Escrow Account (M&A)

A specialist insurance policy used in M&A transactions that covers losses arising from breaches of the seller's warranties and representations in the sale and purchase agreement. W&I insurance shifts the risk of warranty claims from the seller to an insurer, enabling cleaner exits for sellers and reducing the need for escrow holdbacks.

A specialist insurance product used in M&A transactions that covers the buyer against financial losses arising from breaches of the seller's warranties and representations in the sale and purchase agreement. W&I insurance has become standard in European PE transactions, enabling cleaner exits (as the seller's liability is capped or eliminated), facilitating auction processes, and allowing PE funds to distribute sale proceeds to LPs without retaining escrow reserves.

A target level of net working capital agreed between buyer and seller in an acquisition, used as the basis for post-closing purchase price adjustments. The working capital peg ensures the buyer receives a business with a normalised level of operating liquidity, with adjustments made if actual working capital at closing is above or below the agreed amount.

The contractual framework in an M&A transaction that determines how the final purchase price is calculated and adjusted to reflect the financial position of the target at closing. The two principal mechanisms are completion accounts (which adjust the price post-closing based on actual financial metrics at the completion date) and locked box (which fixes the price based on a historical balance sheet date with no post-closing adjustment).

A mechanism used in M&A transactions where the final purchase price is adjusted after closing based on the target company's actual financial position — typically net assets, working capital, debt, and cash — as at the completion date. Completion accounts are prepared post-closing and compared against agreed targets, with adjustments settling the difference between estimated and actual values.

A pricing mechanism in M&A transactions where the purchase price is fixed based on a set of accounts prepared at a specified date prior to completion, with value leakage protections to ensure no value is extracted from the target between the locked box date and closing. Locked box mechanisms provide price certainty and avoid the disputes often associated with completion accounts adjustments.

A mechanism in M&A transactions that adjusts the purchase price based on the difference between actual working capital at closing and a pre-agreed target level. Net working capital adjustments ensure the buyer receives the agreed level of operating liquidity and are a standard feature of enterprise value to equity value bridge calculations.

The agreed level of working capital that the target business should have at the completion of an M&A transaction, established during negotiations and used as a benchmark for purchase price adjustments under a completion accounts mechanism. The target is typically set at the average net working capital over a 12-month trailing period, normalised for seasonality and non-recurring items.