Indemnity, escrow, R&W coverage

What it is

The purchase agreement provisions — often shorthanded as reps and warranties, or R&W — that protect you if a seller's statements about the business turn out to be false, plus the escrow holdback that gives you a real financial remedy — not just a legal right — if that happens. In small and lower-middle-market deals, it's common to hold back roughly 10–20% of the purchase price in a third-party escrow account for 12 to 18 months after closing, covering claims under the indemnification provisions.

Two terms worth knowing going in: the basket is the deductible-style threshold (often around 0.5–1% of deal value) a claim has to clear before you can recover anything, and the cap is the maximum total amount the seller can be made to pay out — frequently set at the same level as the escrow itself.

Why it matters

Representations and warranties are only as good as your actual ability to collect if they're breached. Without an escrow or holdback, your only recourse against a seller who's already spent the sale proceeds is an expensive, uncertain lawsuit — which is rarely worth pursuing for anything short of a very large claim.

What to look for

• No escrow or holdback proposed anywhere in the deal structure
• An indemnification cap too low to plausibly cover realistic exposure on this deal
• A survival period for reps and warranties too short to catch issues that only surface after a full seasonal or annual cycle
• A basket or deductible set high enough that real, smaller claims aren't worth pursuing