Payment Terms: Escrows

April 13, 2006

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If it seems likely that there are significant unknown liabilities associated with your business, the buyer may be willing to assume them if some part of the purchase price is placed in escrow (that is, it's placed in the hands of a neutral third party such as a bank, to be released to either party upon the happening of certain events). If problems surface within a specified time period, the buyer will get some or all of the money back; if nothing goes wrong, the money will be released to you at the end of the escrow period.

Indemnification clauses. Another possible solution is simply to write an indemnification clause into the contract; for example, if the buyer becomes subject to a lawsuit by a customer, employee, supplier, etc., the seller agrees to pay for the buyer's costs of defending the suit and also to pay any damages. The problem with such clauses, obviously, is enforcing them. As the seller, you'd typically prefer an indemnification clause over an escrow, but the buyer may be concerned that he won't be able to find you if the need arises. He'd much rather have some of your cash available, if he meets the terms of the escrow agreement.