Wealth Insights

How a business escrow account could protect your next deal

Explore a practical way to add confidence and clarity to complex transactions.

Key takeaways

• A business escrow account can help protect buyers and sellers by holding funds or assets until agreed upon conditions are met.
• Escrow services are used across mergers and acquisitions, commercial real estate, construction and regulated transactions.
• Working with an experienced, bank based escrow provider may help reduce risk, improve transparency and support compliance.

The escrow agreement is often one of the final steps in a business deal, but it’s also one of the most important for both parties. Learn about the types of business escrow accounts available and how they could help protect your company’s assets in this type of transaction.

Whether you’re acquiring another company to expand your business, purchasing new equipment, updating your facilities to better serve your clients, buying or selling commercial real estate, or selling your business to retire, an escrow account is designed to help ensure the success of your business deal. In any of these situations, it’s important to manage the details.

Escrow accounts are there to benefit businesses in all stages, regardless of the size or complexity of the transaction. “Anytime you’re entering into a contract where money, goods, or property are being held for the benefit of another company or for a federal agency, you may need an escrow account,” says Amanda Wesley, Corporate Trust Relationship Consultant at Regions Bank. This is especially true for transactions involving multiple milestones, regulatory oversight, or extended timelines.

A neutral third party holds assets and facilitates transactions

During the escrow process, a neutral third party is enlisted to act as an intermediary. The escrow agent keeps assets segregated until all the conditions of a transaction between two parties are satisfied. This process benefits both the buyer and the seller because the escrow agent:

• Ensures that both parties in a transaction meet the requirements or milestones of the agreement before money or assets are released.
• Provides transparency and security for all of the transactions between the two parties.
• Can monitor complex, multi-year transactions to ensure that all obligations are fulfilled before the settlement is finalized.
• Uses secure digital platforms to manage documentation, approvals and disbursements.
• Implements structured controls designed to reduce wire fraud risk and unauthorized fund transfers.
• Provides detailed reporting that supports audits, compliance and dispute resolution.

The escrow agent plays a central role in building confidence between both parties in a transaction. Throughout the life of the agreement, the agent manages required disbursements, transfers funds, and handles payments, helping ensure that all financial movements occur according to the terms of the escrow agreement.

Different types of escrows meet a variety of business needs

While the common element of all escrow accounts is a signed agreement between two parties — typically a buyer and a seller — the reasons for creating the agreement and its terms can vary widely. Below is a description of five of the most common types of escrows used by businesses today.

Mergers & acquisitions or indemnity escrow

Escrow accounts are essential for both the buyer and the seller whenever a business merger or acquisition takes place.

“Whether you are a multibillion-dollar publicly traded corporation or a small business, an experienced escrow agent can be a key part of a complex buy-sell transaction,” explains Julz Burgess, Head of Institutional Services and Corporate Trust at Regions Bank.

A business that is acquiring another company typically wants to avoid unexpected encumbrances that might change the nature of the deal, such as liens or unresolved creditor claims against the assets of the business being purchased. An M&A escrow agreement is generally used to make sure that funds are set aside to protect the buyer from possible losses in such situations.

Environmental escrow

If your business is involved in a project that directly affects the environment, chances are you have a need for an environmental escrow or a “stand by” escrow account. This type of escrow sets aside funds in accordance with federal or state environmental requirements.

Environmental escrows are increasingly used to support:

• Ongoing remediation projects
• Phased compliance with environmental permits
• Long term monitoring or mitigation obligations tied to property or infrastructure development

1031 exchange escrow

If you’re buying and selling real estate, a 1031 exchange escrow may be used to help you defer capital gains tax payments on a property sale. By placing the proceeds with a Qualified Intermediary, it could help ensure you abide by the IRS rules and help you purchase another property within strict, clearly defined timeframes.

Collateral deposit escrow

Another common type of escrow is the collateral deposit escrow. In this situation, the escrow agent holds the property of one party (such as stocks or money) as security to guarantee performance by the other party. For example, while the buyer of new machinery is waiting for its delivery, it may choose to put the payment for that machinery in escrow until the machinery actually arrives. Once it does, the escrow agent releases payment to the seller.

Retainage escrow

Retainage escrow accounts are used by private businesses to assure that a contractor who is hired for a construction project finishes all of the required work. In this case, the escrow agent and account holds (or “retains”) a certain percentage of the final payment until the project is completed to the buyer’s satisfaction.

Some states have mandatory requirements for retainage, outlining when it applies and how much can or must be withheld. Still, property owners in any state can include retainage escrow requirements in their contracts when hiring a contractor to work on their property.

Choosing an escrow agent

With any type of escrow account, it’s important to choose a knowledgeable, experienced escrow agent to help your business navigate the nuances and requirements of an escrow agreement for your transaction.

At Regions Bank, we have a dedicated Escrow Services division with the experience and solutions to help you with your transaction. With a streamlined process, knowledgeable staff, and standardized documents, Regions Bank allows you to stay on your timeline with an expedited process.

Learn more about our escrow services, email our team or request a contact from a Corporate Trust Strategist to discuss the structure that best supports your next transaction.