Escrow is an arrangement in which a neutral third party holds funds or documents on behalf of a buyer and seller and releases them only when agreed conditions are met, protecting both sides through earnest money, closing, and any post-close holdback.
Worked example
| Stage | In escrow |
|---|---|
| At LOI, earnest money | $15,000 |
| At closing, funds & docs exchanged | Full price |
| Post-close, indemnity holdback | $50,000 |
| Holdback release (survival period) | 12 months |
The $50,000 holdback sits in escrow so any valid indemnification claim has real money behind it.
Why it matters when buying a business
Escrow removes counterparty risk at every handoff. It safeguards your earnest money, funds indemnification claims, and holds back a slice of the price until a working-capital peg is trued up. Always use a licensed escrow agent, never let funds pass hand-to-hand.
