Escrow and trust arrangements in a business acquisition: securing the purchase price

Security pots are not an end in themselves. They are used where risks or open cash movements remain after closing. Classical is the warranty reserve. Part of the purchase price stays on an account for a defined period and is available for claims from warranty breaches. A second typical use is the tax indemnity, for example when a tax audit is ongoing.

Thirdly the trust arrangement serves the mechanics of a purchase price adjustment. Where the final purchase price is only determined through completion accounts, the spread between the estimate and the final calculation is a classic point of dispute. A security pot ensures that the balance after calculation is actually available. How this logic works is shown in the post on the purchase price adjustment.

A further use case is the holdback clause. It retains part of the purchase price directly with the buyer, often with interest, without an external trustee. This form is leaner but weaker for the seller because no external party holds the pot.

The typical amount of a security pot lies between five and fifteen percent of the purchase price, depending on the risk profile. For particularly sensitive files or open proceedings a higher share can make sense. Proportionality matters. A pot that is too small gives no security, a pot that is too large ties up funds at the seller without cause.

The duration is oriented at the limitation periods of the warranties. A two-stage structure is often chosen: part of the pot is released after twelve to eighteen months, the rest remains until the tax warranties expire. The pot adapts to the risk structure. A flat single-release solution is simpler but less flexible.

Release conditions must be clearly defined. The usual rule is automatic release on the reference date, to the extent no claim has been notified. Where claims are open, the corresponding amount remains in the pot until clarification. Disputed cases belong in a pre-agreed dispute resolution. How the warranty catalogue orders the limitation periods is shown in the post on the SPA warranty catalogue.

In M&A transactions in Austria the trust is often run by a lawyer or a notary. Both professions are familiar with trusts and are secured by professional rules and insurance. With a lawyer trust, a dedicated trust register of the relevant bar association applies with standardised procedures.

The trust account is expressly held as such and is separated from the other assets of the trustee. The contract terms govern who may deposit money, who may receive it and which release events must occur. A specific interest rate is expressly agreed, as are the handling of fees and expenses.

In large international transactions bank escrow accounts are added. Banks offer their own escrow products with standardised contracts and defined release modalities. Which solution fits depends on volume, language of the contract documentation and convenience. The basic concept is explained in the glossary.

Instead of a classical security pot, bank guarantees or insurance bonds can be used. The seller receives the full purchase price, the buyer is secured by the guarantee. This solution avoids tied-up capital but costs guarantee fees and requires a creditworthy security provider. With W&I insurance, individual warranty clauses can also be backed by the insurer.

The interest on the trust account is not self-evident. In times of higher money market rates an express agreement on how interest is allocated pays off. The common rule is an allocation in proportion to the later release to buyer and seller. Without a clause the interest remains with the trustee or flows according to the account rules.

On the tax side the treatment of the security pot needs attention. The seller in principle realises the purchase price with the transfer of the shares, regardless of whether part is retained. Later repayments to the buyer from warranty breaches can be treated as a purchase price reduction. These topics belong in structuring tax advice. How insurance works as an alternative is shown in the post on W&I insurance.