Get marketing news you’ll actually want to read

When structuring a deal that involves held proceeds, the custodial arrangement serves as a bridge between closing and payment, reducing risk for both sides. Effective custodianship requires selecting a trusted third party with robust controls, insurance, and clear audit trails. The custodian must be able to hold funds securely, segregate assets from the sponsor’s own accounts, and provide timely disclosures about activity. Parties should define exactly what is being held, for what purpose, and under what conditions funds can be released. Detailed language minimizes ambiguity and lays a transparent foundation for post-closing monetization while preserving leverage for indemnities or dispute resolution if liabilities arise.

Escrow terms accompany custodial arrangements to address potential liabilities such as tax obligations, undisclosed claims, or post-closing adjustments. A well-drafted escrow agreement outlines the escrow amount, the release schedule, and the permitted uses of funds. It also clarifies how disputes will be settled and the mechanism for disbursement if claims are not resolved within a specified time. Careful calibration ensures the amount is sufficient to cover plausible liabilities without unnecessarily tying up capital. Both sides benefit when the escrow conditions are objective, time-bound, and tied to measurable milestones that align with the risk profile of the transaction.

Negotiating custodial arrangements begins with a due diligence checklist that identifies all cash flows, asset classes, and potential encumbrances. Parties should verify the custodian’s capacity to perform, including service levels, breach remedies, and contingency plans for operational disruptions. The contract should specify who bears risk for misappropriation, how access is granted, and what auditing rights exist. It is prudent to require independent confirmation of funds at set intervals and to mandate secure, traceable transfer protocols. A well-structured custodial clause reduces post-closing uncertainty and creates a governance mechanism that supports both financial integrity and strategic flexibility during integration.

Escrow design benefits from aligning fund release with verifiable events. Consider tying disbursements to objective milestones such as successful regulatory clearance, completion of tax clearance, or predefined revenue milestones. Include a waterfall provision that prioritizes severance payments, tax obligations, and then residual cash. To prevent opportunistic behavior, outline conditions under which early release would be permitted or restricted, and specify the process for adjusting the escrow in response to new information. A transparent framework for claims notices, cure periods, and escalation pathways strengthens commercial trust while maintaining enforceable protections.

A robust escrow agreement should carve out remedies for breaches in governance, information leakage, or misrepresentation. Define who may initiate claims, how they are documented, and what evidence is required to substantiate a liability. The agreement should also specify how the escrow agent handles sensitive data and restricted disclosures, ensuring compliance with privacy laws and contractual confidentiality. Importantly, parties should determine whether escrowed funds can be used to fund defense costs or settlements and under what conditions such allocations are permitted. Clear, mutually understood procedures minimize litigation risk and promote timely, fair outcomes.

Tax clarity is a frequent source of post-closing disputes, making tax-related escrow provisions essential. The contract should require tax opinions or representations that reflect the expected tax position of the target and any liabilities that may flow through to the buyer. It’s wise to reserve portions of the escrow to cover potential understated tax liabilities or late-filed assessments. An explicit mechanism for handling tax refunds, credits, or offsets helps prevent misallocation of funds and ensures a predictable financial impact. Both sides gain when tax risk is quantified and managed within the escrow framework.

In parallel with custodial and escrow terms, liability caps should be calibrated to transactional realities. Overly aggressive caps may leave a buyer underprotected, while excessive caps can undermine the seller’s value proposition. The contract should tie caps to the materiality of specific misrepresentations, the time horizon of potential claims, and the likelihood of exposure. A tiered structure, where smaller claims drain a portion of the escrow and larger claims trigger more formal remedies, can balance risk without stalling the deal. Clear thresholds reduce the need for protracted negotiations after signing and encourage a smoother integration.

Allocation of responsibility for ongoing compliance ensures that the post-closing period remains well-managed. Assign ownership of regulatory filings, IP disclosures, and financial reporting to specific teams, with defined review cycles and escalation paths. The custodial and escrow framework should require periodic certification that obligations are being met and that any events impacting liabilities are promptly disclosed. Such proactive governance protects both sides from surprise liabilities and supports a timely transition to normal operations, preserving business continuity and strategic momentum.

Negotiation dynamics favor early collaboration on dispute resolution frameworks. Consider a multi-tier approach: negotiation, mediation, and then arbitration, with each stage accompanied by defined time frames. The agreement should specify the governing law and the mechanism for appointing neutral experts when technical valuations arise. Early-stage dispute resolution reduces costly litigation while preserving relationships and preserving capital in escrow for the right claims. It’s important to document what constitutes a material dispute and how it impacts the release or retention of escrowed funds, tying resolution speed to financial outcomes.

Confidentiality obligations should extend to the custodial agent and any mediators or arbitrators involved. The agreement should impose strict data handling standards, limit access to necessary personnel, and include security certifications or attestations from the custodian. Breach consequences must be explicit, including potential removal of the custodian, indemnities, or adjustments to escrow availability. Strong confidentiality safeguards reassure both parties that sensitive commercial information, trade secrets, and strategic plans remain protected throughout the post-closing process.

Finally, the selection of a custodian should be treated as a strategic decision, not a mere formality. Evaluate candidates on financial stability, regulatory compliance history, and client references. Request a demonstration of internal controls, segregation of duties, and real-time reporting capabilities. Consider including an audit clause that allows for independent verification of fund status and activity logs. Mutual assurances about dispute handling and termination scenarios help ensure continuity if the primary custodian cannot perform. A carefully chosen custodian becomes a trusted partner in safeguarding value during a period of transition and risk.

As negotiations progress, draft language that translates these principles into a single, enforceable instrument. Attach schedules detailing the escrow amount, release criteria, and contingency triggers, plus a clear diagram of the flow of funds from closing to final settlement. Ensure all defined terms are consistently used and harmonized with other deal documents to avoid interpretive gaps. The ultimate objective is a balanced framework that protects cash proceeds, manages residual liabilities, and sustains confidence among shareholders, lenders, and regulators as the business transitions.