Escrows protect all parties in complex transactions. In an unpredictable world, the importance of using an escrow agent to safeguard assets in M&A deals is likely to grow.
Global mergers and acquisitions (M&A) activity has been challenging in the first half of 2023 due to recession fears, geopolitical risks, and rising interest rates.
M&A professionals often subscribe to the idea that there are deals to be made in both good markets and bad, and that those deals will drive demand for escrow services. Complex M&A deals have long been a primary source of escrow opportunities, and in unpredictable times all parties recognize the importance of this vital safeguarding mechanism.
To escrow or not to escrow
Escrow will never get pulses racing as an element of big corporate deals. But when large amounts of money—often millions and billions of dollars—are on the line, it’s prudent business practice.
In an acquisition, historically 10% of the sale price of the asset will be set aside in escrow. It’s best practice for an independent third party to hold that money on the instruction of both seller and buyer. The escrow agent will release the funds when the terms and conditions outlined in the escrow agreement have been met.
Why is this important? Quite simply because things don’t always go according to plan. Due diligence on a multimillion or multibillion-dollar deal can identify unexpected issues and alter the value of the asset.
For example, there may be tax considerations that weren’t obvious at the start of the sale process. There may be legal disputes, or regulatory issues that experts unearth when they start digging into the details of complex corporate entities, especially those that cross borders.
Some of the sale price will likely be set aside for a purchase-price adjustment to make up for changes in the valuation of the assets that arise from the due-diligence procedure.
Escrow offers peace of mind to all parties involved in a complex M&A processbecause they know that money is available to deal with any eventuality.
Modern finance for transparency and trust
To that end, the use of escrow services increases transparency in the process and trust between parties. That’s unquestionably a good thing for a transaction that can take a few months but may stretch to years.
Engaging a neutral third party like CSC that’s trusted by all sides and beholden to none is clearly best practice in these circumstances. An independent agent will safeguard escrow funds or assets in accordance with the escrow agreement, without favor or bias.
Escrow best practice
Reputable escrow providers such as CSC practice sound business discipline from one end of the process to the other. They’re experienced in complex transactions at a regional and global level.
As well as having the right back-end systems and processes in place, they’re skilled communicators. Keeping every party abreast of developments in an M&A deal is a key part of the role. The escrow agent is a conduit for information between the buyer and seller and intermediaries such as lawyers and M&A advisors.
And what do escrow agents see as best practice from clients? CSC is a long-established escrow service provider across a wide range of transaction types. Our main advice for potential clients is to think about engaging an escrow agent early in the process.
The earlier you contract an escrow provider, the sooner you have the peace of mind that comes from knowing you are doing everything possible to facilitate a smooth, transparent, and mutually satisfying transaction.
Why CSC
CSC is a leading provider of global business administration and compliance solutions, including a comprehensive suite of administration, financial, and agency services for debt issuances, securitizations, structured finance transactions, and restructuring mandates. We have office locations and capabilities in more than 140 jurisdictions across Europe, the Americas, Asia Pacific, and the Middle East, deploying experts in every market we serve. Our Global Capital Markets team has a wealth of expertise and deep institutional experience. We carefully analyze each deal and tailor services accordingly to provide bespoke solutions to our clients’ requirements.
We’re the trusted partner of choice for 90% of the Fortune 500®, 10,000 law firms, and more than 70% of the PEI 300. Headquartered in Wilmington, Delaware, USA, CSC has been privately held for more than 120 years and acts as stable and conflict-free provider. Our broad geographic coverage means we possess local knowledge and infrastructure to support capital market participants worldwide. We are the business behind business®. Learn more at cscgfm.com.
Find out more about escrow best practices
Risk mitigation is top of mind in any complex corporate transaction and in the current climate, the value of an independent escrow agent to safeguard assets is critical. Learn how to ensure your transactions are completed smoothly and compliantly. Download our Escrow Best Practices guide.