When is Escrow Account Required?
An escrow is a financial arrangement in which a third party holds property such as money or documentation until specific conditions of the transaction have been met. Companies may require an escrow for several reasons, but first and foremost to ensure security and transparency by involving a trusted third party.
Meeting Conditions of a Transaction
An escrow account holds funds or assets temporarily until the conditions of a transaction are met. It ultimately protects both parties from risks such as potential breaches of contract or undisclosed liabilities.
Seller Obligations
In addition, an escrow ensures seller obligations are fulfilled post-closing, such as pending legal issues or meeting financial targets. Protecting the assets of a transaction ensures those funds are still available if those commitments are not met.
Indemnification Claims
In situations where representations and warranties made by the seller are inaccurate or potentially misleading, escrow funds can be used to cover indemnification claims. This ultimately reduces a firm’s financial exposure.
Performance Milestones
Performance milestones can include earn-outs and other performance-based payouts. An escrow agent holds those funds until a certain business performance milestone is reached by the acquired company.
Post-Closing Assessments
In deals where the financial purchase price or the final purchase price depends on post-closing assessments of issues such as working capital or of earnings quality, escrow funds can be used to settle any discrepancies between those initial estimates and final numbers.
Independent Global Escrow Agent
Kroll has the expertise and personalized service delivery to mitigate risk and ensure successful outcomes for escrow and paying agent requirements, allowing our clients to focus on other aspects of financing or acquisition that require their attention. We take the burden off your hands to securely receive and hold your funds and disburse them at the necessary times detailed in the contract. Learn more.
