Smaller deals also benefit from escrow accounts
Trust plays a decisive role in the sale of companies in the SME sector. Especially in small and mid-cap transactions, a single uncertainty about payment or obligations can jeopardize the entire deal. Escrow accounts - often referred to as escrow agreements - are a proven way of securing both sides.
Such models protect buyers and sellers alike: Buyers reduce their risk in the event of outstanding claims, while sellers receive certainty about the receipt of payment. Escrow accounts thus create a neutral authority between the parties and minimize the risk of breaches of contract.
Why fiduciary accounts are gaining in importance
The current market and economic situation means that fiduciary solutions are being used more frequently in M&A processes. Global uncertainties - from inflation and trade conflicts to geopolitical tensions - are increasing the need for reliable protection. In addition, transactions are becoming more complex, particularly with regard to tax issues, regulation and intellectual property.
In a positive interest rate environment, escrow accounts can also represent an economically interesting alternative to notary solutions or W&I insurance. Interest incurred can offset some of the costs. The actual costs depend on several factors, including the transaction amount, term, regulatory requirements and disbursement modalities.
Fiduciary solutions also offer practical advantages: In deals with several existing shareholders, numerous payments often have to be processed for closing. Notaries do not always have the necessary infrastructure for this. Specialized, regulated service providers (e.g. with a PSD2 license) can take on these tasks much more efficiently.
Often overlooked safeguard in the transaction process
The high time pressure in M&A processes often means that too little consideration is given to alternative hedging instruments. Instead of evaluating new solutions, many parties involved fall back on familiar structures. Consultants also do not always actively integrate fiduciary models, even though they could create added value in critical phases.
It is important to note that the size of a deal says little about the need for protection. Especially in the small-cap segment, the parties are often less experienced in transactions, which makes security mechanisms more important. The basic rule is therefore: no M&A transaction is too small for an escrow account.
Costs, flexibility and use in M&A practice
Compared to traditional alternatives, escrow accounts are often competitive - especially in transactions with a longer commitment of purchase price components. In large-cap deals, notary costs for escrow services can be considerable, which makes non-notarial solutions even more attractive. However, escrow accounts can also make more economic sense for medium-sized companies, depending on the interest rate situation and term.
It is crucial to consider fiduciary solutions as part of the M&A toolbox at an early stage. They offer flexibility, increase transaction security and should therefore be examined and actively integrated into the process by both buyers and sellers as well as advisors.
This is a guest article by Sven Haase, Business Development Director at CSC.
