Escrow does not cap what a seller owes after closing

Key takeaways

You sell your business for $12 million, and $1.2 million stays in escrow. It is easy to assume that this is the most the buyer can recover if problems emerge after closing. But the escrow only holds funds to pay claims. Two other terms determine what you may owe. The basket sets the loss threshold for payment and whether the buyer bears losses below it. The cap sets your maximum liability for covered claims. Together, these three terms help determine how much of the sale price you ultimately keep.

SRS Acquiom’s 2026 study examines more than 2,300 acquisitions of privately held companies completed between 2020 and 2025. Among 2025 deals with an indemnification escrow and no representations and warranties insurance identified, the median amount held back stayed at 10% of deal value. The average increased from 10.9% to 11.3%. Deductible baskets, which leave the buyer responsible for losses below the threshold, became less common. Among deals without identified insurance, the share in which sellers’ general representations ended at closing fell from 18% to 11%. In more of those deals, sellers remained responsible after closing for the accuracy of statements they made about the business.

Consider a hypothetical $12 million sale. The agreement puts $1.2 million in escrow, sets a $90,000 basket, and caps liability for ordinary representation breaches at $1.2 million. After closing, the buyer proves that an inaccurate statement about the business caused $400,000 in qualifying losses. Assume there are no other claims or adjustments. With a deductible basket, the buyer absorbs the first $90,000, and the seller pays $310,000. With a first-dollar basket, the $90,000 is only a trigger. Once losses cross it, the seller pays the full $400,000.

Now consider a separate case in which the buyer proves $1.8 million in qualifying losses. With a first-dollar basket and a $1.2 million cap, the seller’s payment stops at $1.2 million. The escrow can cover that amount if the full balance remains available. But if the cap is 20% of the sale price, or $2.4 million, the result changes. If the agreement allows claims beyond escrow, the seller owes the full $1.8 million. The escrow covers $1.2 million, and another $600,000 comes from other seller funds. With that same 20% cap and a $90,000 deductible basket, the seller owes $1.71 million, including $510,000 beyond escrow.

The buyer wants money available if a claim succeeds. The seller wants to know how much could still be lost after the sale. Setting the cap at the escrow amount helps, but the agreement also needs to address when funds are released and whether other claims can use them. A clause making escrow the only source of payment for general representation claims can protect proceeds already received. Its exceptions deserve close attention. Fraud, taxes, share ownership, and specifically identified risks may have separate limits or longer periods for bringing claims.

Before signing the LOI, seek agreement on how much will stay in escrow, when it will be released, which basket applies, and the cap on ordinary claims. Ask whether the buyer can pursue money beyond escrow and which claims fall outside the agreed limits. Settling these points early gives you a clear view of both the cash available at closing and the amount that could remain at risk afterward.

21% of business owners in Value Builder's Q2 2026 Exit Readiness Index received a written offer for their company in the past year, up from 13% in late 2024. More offers have not translated into higher valuations, though. The median offer remained at 3.0x earnings, and the share of offers at 5x earnings or more fell to 21% from 25%. Only 1.0% of the 1,032 businesses assessed scored 80 or higher on Value Builder's readiness scale, the level it links to premium valuations. For an owner receiving an unsolicited offer, the question is whether the proposed multiple reflects the company’s value.

A buyer approaches you with an unsolicited LOI offering 3.0x earnings and asking for 60 days of exclusivity. What is your first move?

This write-up explains how business owners can respond to an unsolicited acquisition offer without letting the buyer set the pace. It recommends pausing before negotiating, limiting internal awareness to a small trusted group, and signing an attorney-reviewed M&A nondisclosure agreement before sharing confidential information. Sensitive details, including key customers, should remain protected during early discussions. The piece also examines buyer motivations, from strategic acquirers seeking synergies to private equity firms looking for a platform or expansion opportunity.