An escrow account is established at closing and is funded from a portion of the purchase price. The account is held with a neutral third party (e.g., an escrow bank) to be used as a source of payment to the buyer in the event the buyer becomes entitled to indemnification. After a specified period of time (the escrow claims period, which often is the same as the survival period for general representations and warranties), the balance of the escrow account is paid to the former securityholders. Some transactions may include interim escrow releases, which distribute a portion of the escrow at scheduled dates prior to the end of the survival period, subject to any claims against the escrow.

Deals often contain a provision that adjusts the purchase price based on the difference between the estimated closing working capital (or another balance sheet item) calculated at closing and the actual closing working capital amount calculated post-closing. While the timing of adjustment mechanics vary from deal to deal, buyers are usually required to deliver their calculations to Fortis within 60 to 90 days after closing. Once Fortis receives the buyer’s calculations, it will work with Advisory Group to confirm the calculations. Upon resolution of the adjustment amount, if there is a positive adjustment, and the terms of the agreement provide that the securityholders are entitled to receive a positive adjustment amount, a distribution will be processed. Generally this payment will be made in the same manner as the closing payment. If the adjustment is negative, the terms of the agreement will determine if and how the buyer will be reimbursed by the holders for the negative adjustment (indemnity escrow, special working capital escrow or directly from the holders).  If a special working capital escrow or holdback was set aside at closing, usually the remaining amount, if any, will be released to the securityholders upon resolution of the adjustment amount. 

An earnout is a potential post-closing distribution that increases the purchase price when the seller or surviving company reaching certain milestones (ie. revenue targets or regulatory approvals). A milestone must be met or achieved in order for the earnout payment to be distributed to the securityholders. Often, the time period for an earnout to be achieved varies depending on the type of milestone and there may be a sunset (end) date.

When the Buyer receives a tax refund from the IRS on behalf of the selling company, and the terms of the agreement provide that the securityholders are entitled to receive the tax refund amount, a tax refund distribution is made to the former securityholders (or in the case it is a smaller amount, it may be deposited into the escrow fund for future distribution to the holders).

An expense or reserve account is established at closing and is funded from a portion of the purchase price. The account is typically held by Fortis or with a neutral third party (e.g., an escrow bank) to be used to cover expenses, fees, costs and other amounts related to the transaction on behalf of the securityholders. Upon the final post-closing distribution, the remaining expense fund balance is available to be released to the former securityholders.