Escrow is a popular choice for risk minimization among buyers considering an M&A deal. If the buyer is wary about handing over a large sum of money with no refund, then they can put some of the purchase price money in an escrow account. Once the seller has fulfilled all obligations, the money is released to them over a period of time. This way, if an unforeseen predicament occurs and something goes wrong with the seller’s side of the bargain, the buyer can keep the escrow money.
The benefit for the seller is generally a higher overall profit. However, the seller must be confident in the success of the business and the honesty of the final contract in order to make such an agreement. This deal allows the seller to “put the money where their mouth is.”
An escrow account is held by a third party, usually a bank. The buyer and seller agree on a fixed price and then once the given requirements have been satisfied, the money is released to the seller. The escrow generally consists of 10 to 15 percent of the total purchase price. The escrow is released in installments that can span a few years’ time.
If you are a buyer that is unsure about the validity of a seller’s claims, then it may be time to consider using escrow coverage. To learn more about escrow and how to handle the sale of your business, contact the professionals at George & Company.