What are working capital adjustments and escrows, and how much of my sale price will I actually get at closing?

The headline price in a letter of intent is not the check you receive at closing. Three things sit between the two numbers: a working capital adjustment, an indemnification escrow or holdback, and sometimes an earnout. Founders who only negotiate the headline tend to learn about the other three after they have signed.

The working capital adjustment

Buyers price a company on the assumption that it closes with a normal level of working capital: receivables and other operating assets, minus payables and deferred revenue. That normal level is the peg. Close below it and the price drops dollar for dollar. Close above it and the price rises.

The fights are about how the peg is built. Which months get averaged, how deferred revenue is treated, and which accounting method applies. A peg set a little high is a price cut that never appears in the headline. Have your finance lead and your advisor model the peg before the LOI is signed, not after.

The SRS Acquiom 2026 deal terms study covers more than 2,300 private-target acquisitions closed between 2020 and 2025. Among 2025 deals with a purchase price adjustment, 89 percent of deals with representations and warranties insurance and 53 percent of deals without it held a separate escrow just for the adjustment. In recent years the median size of that escrow has sat around 1 percent of transaction value.

The indemnification escrow

Part of your proceeds is held back to cover claims that the company's representations turned out to be wrong. In the same study, 2025 deals without representations and warranties insurance had a median general indemnification escrow of 10 percent of transaction value. Deals with insurance had a median of 0.5 percent. The median survival period for the general representations was 12 months.

On a $20M deal with no insurance, that is about $2M of your proceeds sitting for about a year. That is arithmetic on the median, not a prediction about your deal.

What to negotiate

• Insurance. Ask whether the buyer will use buy-side representations and warranties insurance. It is the biggest reason the escrow falls from around 10 percent to under 1 percent in the data.
• Release date. Twelve months is the median. Ask for earlier partial releases if the company has clean books.
• Cap and basket. The cap is the most you can lose to claims. The basket is how much has to pile up before claims count. Push for a cap equal to the escrow, so the escrow is the buyer's only recourse. In the 2025 data, 54 percent of deals with escrows or holdbacks set the cap at exactly the escrowed amount.
• Who decides disputes. Know who represents the sellers after closing and who pays for that.

Add it all up before you compare offers

Escrows, holdbacks and earnouts all push cash later. Two offers with the same headline price can put very different amounts in your account on closing day. Line them up by cash at close, cash at 12 months, and cash that depends on the buyer's behavior.

Related reading: what a letter of intent should lock down, how to structure an earnout that pays, what to do when an earnout dispute starts, what due diligence finds, and whether you need a banker.