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Even smaller deals benefit from escrow accounts
Trust plays a crucial role in the sale of small and medium-sized businesses. Especially in small- and mid-cap transactions, even a single uncertainty regarding payment or obligations can jeopardize the entire deal. Escrow accounts—often referred to as escrow agreements—are a proven way to protect both parties.
Such arrangements protect both buyers and sellers equally: buyers reduce their risk regarding outstanding claims, while sellers gain certainty that payment will be received. In this way, escrow accounts create a neutral third party between the parties and minimize the risk of contract breaches.
Why Escrow Accounts Are Gaining Importance
The current market and economic situation is leading to more frequent use of escrow solutions in M&A processes. Global uncertainties—ranging from inflation to trade conflicts and geopolitical tensions—are heightening the need for reliable safeguards. In addition, transactions are becoming more complex, particularly with regard to tax issues, regulation, and intellectual property.
In a positive interest rate environment, escrow accounts can also represent an economically attractive alternative to notary solutions or W&I insurance. Accrued interest can offset a portion of the costs. The actual costs depend on several factors—including the transaction amount, term, regulatory requirements, and disbursement terms.
Trust solutions also offer practical advantages: In deals involving multiple existing shareholders, numerous payments often need to be processed at closing. Notaries do not always have the necessary infrastructure for this. Specialized, regulated service providers (e.g., with a PSD2 license) can handle these tasks much more efficiently.
Often Overlooked Safeguards in the Transaction Process
The intense time pressure in M&A processes often leads to alternative safeguards being given insufficient consideration. Instead of evaluating new solutions, many parties involved fall back on familiar structures. Even advisors do not always actively integrate escrow models, even though they could add value during critical phases.
It is important to note that the size of a deal says little about the need for safeguards. Particularly in the small-cap segment, the parties often have less transaction experience, which makes safeguards all the more important. The basic rule is therefore: No M&A transaction is too small for an escrow account.
Costs, Flexibility, and Use in M&A Practice
Compared to traditional alternatives, escrow accounts are often competitive—especially in transactions involving the extended holding of portions of the purchase price. In large-cap deals, notary fees for escrow services can be substantial, which makes non-notarial solutions even more attractive. But even in the SME sector, escrow accounts can be more economically sensible—depending on interest rates and the term of the arrangement.
It is crucial to consider escrow solutions early on as part of the M&A toolkit. They offer flexibility, enhance transaction security, and should therefore be evaluated by both buyers and sellers, as well as by advisors, and actively integrated into the process.
This is a guest post by Sven Haase, Business Development Director at CSC.
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