What is an escrow payment?

An escrow payment is a cash payment that is deposited with an independent third party; the third party is only authorized to release the escrowed funds under certain predetermined circumstances.

For example, Able Company acquires Beta Company for $10,000,000, with $1,500,000 of the payment to be held in escrow for 18 months. During the 18-month period, if Able finds any problems with the representations made by the former owners of Beta Company that it can monetarily quantity, it can subtract them from the escrow, with only the remainder being paid to the Beta Company shareholders. The independent third party will return all remaining funds to Able Company after the 18-month period has been concluded.

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