Escrow Payment for Deal

August 16, 2022

by a searcher from University of Texas at Austin in Houston, TX, USA

-How typical is it to put down an escrow payment for a lower middle market M&A transaction that is less than $5MM.
-In situations where an escrow is required by the broker and/or seller what is the typical required amount?
-When an escrow is required and there are terms that will have the deposit go "hard" how can the buyer protect himself/herself from unforeseen contingencies?

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Reply by an intermediary
from Wake Forest University in Winston-Salem, NC, USA

Opinions and practices vary, but we get one on almost all transactions (unless the buyer is a large corporate or well established PEG/family office with a portfolio). Even on our buyside engagements, we encourage the buyer to put down an EMD. The correlation between the prospective buyer that is willing and able to put up an EMD and actually closing the transaction is quite high. The range is typically 5-10% depending on the size, should be placed in a trust account, and be fully refundable during the due diligence period for buyer backing out "for any reason or no reason". After the due diligence period, it is still refundable if seller breaches.

Reply by a searcher
from Western State University College of Law in Calcutta, OH 43920, USA

I would say an escrow deposit is the norm. I would be somewhat concerned if a seller did not request one. I have typically seen the ~1-5% range depending on the type of deal structure and total purchase price. As to your final question, I strongly recommend using a competent deal attorney to draft, or at the very least review, your purchase agreement to ensure your ability to recover the deposit funds. Make sure to ask your attorney how many deals they have closed in that particular industry/trade/business sector. It helps to have one that knows the ins and outs of the business to better craft the contingencies and conditions to close.

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