RWI vs. Escrow: How to Keep More Cash at Closing Without the Risk
When founders sell a business, one of the biggest surprises often comes after the purchase price is agreed upon. Buyers frequently require a portion of the proceeds to remain in escrow in case problems emerge after closing. In this video, Kirk Michie explains how Rep & Warranty Insurance, commonly called RWI, can sometimes reduce that risk and help both sides close deals more comfortably.
What Are Representations and Warranties?
Every acquisition agreement contains a section called “representations and warranties,” often shortened to “reps and warranties.”
These are legally binding statements made by the seller about the business being acquired.
Examples include:
Confirming ownership of shares
Verifying financial statements
Disclosing liabilities
Confirming tax compliance
Representing that contracts and operations are legitimate
Stating there are no undisclosed legal issues
If any of these statements later prove inaccurate, the buyer may have legal claims against the seller.
This is one reason buyers often ask for escrow holdbacks.
Why Buyers Use Escrow Accounts
In many M&A deals, a portion of the purchase price is placed into escrow for a set period after closing.
This money acts as protection for the buyer if unexpected liabilities surface later.
For founders, this can be frustrating because it delays access to proceeds that were expected at closing.
Depending on the size and structure of the transaction, escrow amounts can become substantial.
What Is Rep & Warranty Insurance (RWI)?
Rep & Warranty Insurance is a specialized insurance policy designed to protect against losses tied to breaches of representations and warranties.
Instead of relying entirely on seller escrow funds, the insurance policy can cover certain post-closing risks.
In many cases:
The buyer pays for the policy
The seller and buyer split the cost
Escrow amounts can be reduced
Sellers receive more cash at closing
For larger transactions, RWI has become increasingly common because it can simplify negotiations and reduce friction.
Why RWI Can Be Valuable for Founders
One of the biggest benefits of RWI is liquidity.
Without insurance, sellers may need to leave millions of dollars tied up in escrow accounts for months or even years.
With RWI, the parties may be able to reduce those holdbacks significantly.
That can improve:
Founder liquidity at closing
Post-sale financial flexibility
Negotiation efficiency
Buyer confidence
Transaction speed
For many founders, the insurance premium becomes relatively small compared to the value of immediate access to proceeds.
Not Every Deal Qualifies for RWI
Rep & Warranty Insurance is not automatic.
Insurance underwriters typically conduct extensive diligence before issuing a policy. They often review:
Financial records
Data room materials
Purchase agreements
Disclosure schedules
Legal documentation
Due diligence reports
If the business or transaction structure appears too risky, coverage may be denied or exclusions may apply.
This is why experienced M&A attorneys and transaction advisors often raise the topic early in the process.
