Escrow account

Definition

An escrow account is held by an independent third party (often a solicitor or bank) that releases the funds only when the agreed conditions of a transaction are satisfied.

In plain terms

Neither party can touch the money until the terms are met, so a buyer’s cash is safe until they get what they paid for, and the seller knows the funds exist.

Why it matters for your company

Escrow reduces counterparty risk in acquisitions, deferred consideration and warranty retentions. It is a standard trust mechanism in deals. See retention.

In practice

Picture a UK limited company selling a subsidiary. The buyer and seller agree a headline price, but part of it is held back in escrow rather than paid on completion day. The instructed solicitor or bank controls the account, and neither party can draw on it unilaterally.

Release typically follows a defined trigger: satisfactory completion accounts, resolution of a warranty claim, or simply the passage of an agreed review period without a dispute being raised. Until that trigger is met, the money sits outside both companies' working capital, which the finance team needs to plan around rather than treat as available cash.

If a dispute does arise — say the buyer alleges a breach of warranty — the escrowed sum becomes the pot both sides negotiate against, rather than money the seller has to claw back after the fact. That is usually far less contentious than chasing a payment already made.

How lenders and advisers read it

An escrow arrangement on a company's balance sheet is generally read as a sign of a properly structured, professionally advised transaction rather than a red flag. Funds held in escrow are typically treated as restricted rather than freely available, so they are usually excluded when assessing a company's liquid working capital.

A common pitfall is assuming escrowed funds can be relied upon for near-term cash flow — release dates depend on conditions being met, not a fixed timetable, so treating them as certain can leave a business short. It is also worth checking who bears the escrow agent's fees and how disputes over release are resolved, since both can affect timing. See retention for a related mechanism, and deferred consideration for how escrow often interacts with earn-out structures.