Escrow

Escrow is a financial arrangement in which a neutral third party (typically a lawyer or trust company) holds funds on behalf of the buyer and seller during a transaction, releasing them only when specified conditions are met. In Canadian business sales, escrow accounts are used to hold a portion of the purchase price after closing pending resolution of indemnification claims.

Post-closing escrow typically holds 5–15% of the purchase price for 12–24 months. If the seller's representations and warranties prove inaccurate — for example, if an undisclosed tax liability emerges — the buyer can make a claim against the escrowed funds rather than pursuing the seller directly. At the end of the escrow period, any unclaimed funds are released to the seller.

Escrow is a buyer protection mechanism. Its size and duration are negotiated as part of the purchase agreement and reflect the level of risk the buyer perceives in the transaction.

See also: Holdback, Representations and Warranties, Indemnification, Purchase Agreement.