The missing link in M&A - why escrow should take centre stage in risk management
Rather than being a transactional afterthought, escrow should be considered as a proactive solution for managing deal-critical risks in cross-border M&A. In a world where risks are rising rapidly, escrow structures help to build trust and accelerate resolution. They deserve a seat at the strategy table.
In global mergers and acquisitions (M&A), escrow is the process of setting aside a portion of the purchase price in a secure third-party (escrow agent) account for a specified period after a deal closes.
Escrow is often treated as a mere technical detail; a box to be ticked once the deal is signed. However, in today’s complex environment, shaped by regulatory friction and a raft of post-closing risks, that mindset has quickly become outdated.
The reality is that escrow isn’t just a formality; it’s an important strategic tool that can make or break a transaction.
Why escrow and why now?
Modern deals have become riskier.
Higher interest rates and shifting economic policies have created greater uncertainty, making it difficult for buyers and sellers to firmly agree on valuations. Geopolitical instability and ongoing international conflicts have also introduced more systemic risks that can stifle deal flow, while regulators are scrutinising transactions closely, making approvals more time-consuming.
Against this backdrop of increasing complexity, the Harvard Business Review highlighted that between 70% and 90% of M&A deals fail to meet their intended objectives. Buyers and sellers are facing unwieldy timing gaps, higher compliance hurdles and performance obligations that can complicate execution and derail even the most diligently structured deals.
Traditional safeguards, such as indemnities or insurance, are often slow to activate, fail to provide sufficient protection, or are simply unavailable. Even seemingly straightforward claims can be delayed due to procedural steps and the insurer’s own self-interest in minimising payouts.
Escrow fills that gap effectively. It allows both parties to pre-agree on how specific risks will be resolved, with funds held securely by a neutral third party.
These funds guarantee the seller’s post-closing obligations, such as indemnification for future liabilities or purchase price adjustments, and are released when the conditions are met. No delays, no disputes – just a clearer path to resolution.
Escrow as a forward-looking risk management strategy
Escrow structures therefore provide crucial security and certainty by ensuring funds are readily available for claims, incentivising sellers to fulfil their obligations and mitigating the risks associated with international differences in legal standards, trust and enforcement measures.
Global escrow solutions can underpin the shift from reactive to proactive risk management. Instead of crossing their fingers and hoping nothing goes wrong, dealmakers can pre-solve known risks that insurers won’t cover, or that the parties wish to isolate, by setting aside funds with clear release conditions. It’s not about avoiding risk; it’s about controlling it through proactive management.
Escrow offers a compelling range of strategic benefits:
- Certainty of funds. Funds are guaranteed and available when needed. If a claim meets the agreed conditions, the buyer can recover any losses directly from the escrow account. No other external party needs to assess or approve the claim and the release of funds is governed solely by the escrow agreement.
- Speed of resolution. One of escrow’s key advantages is immediacy. Once conditions are met, payouts can happen within a day. There is no risk of waiting months for a contested claim to be settled and no need to incur legal or advisory costs to unlock the protection promised.
- Neutrality and transparency. A third-party escrow agent ensures fairness, transparency and terms that are visible to all parties throughout the deal lifecycle. In addition, escrow encourages a more balanced and accountable relationship between buyer and seller. This helps to promote more open negotiations and encourages both parties to focus on risk management from the outset.
- Achieving alignment. In today’s complex M&A environment, simplicity has real value. With escrow, parties agree on the amount, duration and conditions under which funds are released. Buyers and sellers know the rules and trust the process. Both sides receive reassurance that there is a mechanism in place to resolve issues fairly and efficiently and are shielded from post-deal uncertainties, legal hurdles and financial issues across different jurisdictions.
When escrow makes the difference
As a global provider of escrow solutions, TMF Group has seen firsthand how early engagement with escrow structures can unlock greater deal confidence.
In one scenario, a buyer placed a deposit in escrow before completion. During the due diligence process, the deal subsequently collapsed, but thanks to the escrow arrangement, the funds were returned promptly, without litigation or delay. The buyer’s capital was protected, and both parties were able to exit cleanly and swiftly.
In another complicated cross-border transaction, the seller needed time to secure the required regulatory approvals. Amid the regulatory waiting game, the buyer placed the full purchase price in escrow to be released only once regulatory approvals were confirmed. In turn, this gave the seller confidence to proceed and protected the buyer from premature payment. The deal closed smoothly once all conditions were met.
These aren’t edge cases. They’re real-life examples of escrow’s ability to stabilise deals that are under pressure. They show how escrow is much more than just a financial mechanism; it’s a confidence engine that helps to foster trust between buyer and seller.
Act now to avoid preventable deal collapses
Escrow provides immediate access to funds, reinforces seller accountability and simplifies the path to resolution in the event of a claim.
It’s transparent, more dependable than the alternatives and delivers better alignment between buyer and seller, fewer unpleasant surprises post-completion and, ultimately, a smoother overall experience for both sides.
If you’re involved in M&A activity and not using escrow proactively, then you may be leaving your deal exposed. At TMF Group, we provide support early on in the deal lifecycle to help you structure escrow solutions that will effectively protect both sides.
Find out more about our M&A services or chat with our team today.
