Definition
An indemnification escrow is a portion of your practice’s sale price, typically 10-20%, that is set aside and held by a neutral third party for a specific period, usually 12 to 24 months after the sale. Think of it as a security deposit for the buyer.
If the buyer discovers a significant problem after closing that you had previously guaranteed was not an issue (a breach of your representations), they can make a claim against these funds to cover their losses. If no such issues arise by the end of the period, the money is released to you.
Why This Matters to Healthcare Providers
In healthcare transactions, the risks of hidden liabilities are high. A buyer inherits your practice’s history, including any potential non-compliance with billing regulations, the Stark Law, the Anti-Kickback Statute, or HIPAA. An escrow gives the buyer confidence to move forward with the deal, knowing there is a financial backstop for these specific, high-stakes risks.
Example in Healthcare M&A
Scenario: A multi-physician orthopedic group sells to a private equity-backed platform. In the sale agreement, the physician-owners represent that their billing and coding practices have been fully compliant for the past five years. The buyer places 15% of the purchase price into an 18-month escrow.
Application: Ten months after the sale, a Medicare audit reveals a pattern of improper billing from the year before the transaction. The government requires a repayment of $500,000.
Outcome: The buyer files a claim against the escrow account and uses the funds to pay the $500,000 penalty. This protects the buyer’s investment, but the former physician-owners ultimately receive a lower total sale price because the repayment came from their escrowed funds.
Related Terms
- Representations and Warranties – The specific promises you make about your practice’s condition that, if untrue, can lead to an escrow claim.
- Due Diligence – The buyer’s investigation process to uncover risks. A thorough process on your end can reduce the surprises that might trigger an escrow claim.
- Indemnification – The legal promise to cover the buyer’s losses; the escrow is the mechanism that puts money behind this promise.
Preparing properly for buyer due diligence can prevent unexpected issues. Request a Due Diligence Preparation Session →
About the SovDoc M&A Glossary
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Frequently Asked Questions
What is an indemnification escrow in the context of healthcare practice sales?
An indemnification escrow is a portion of the sale price, typically 10-20%, held by a neutral third party for 12 to 24 months after the sale. It acts as a security deposit for the buyer to cover any losses from breaches of representations made by the seller about the practice’s condition.
Why are indemnification escrows important for healthcare providers?
Healthcare transactions carry high risks of hidden liabilities, such as non-compliance with billing regulations, Stark Law, Anti-Kickback Statute, or HIPAA. An indemnification escrow provides financial security to the buyer against these risks, enabling the deal to move forward with confidence.
How does an indemnification escrow work if a problem is discovered after the sale?
If the buyer discovers a significant problem after closing that breaches the seller’s prior guarantees, they can claim against the escrow funds to cover their losses. If no such problems arise by the end of the escrow period, the funds are released to the seller.
Can you provide an example of an indemnification escrow in a healthcare M&A transaction?
In a sale where a physician group represents compliant billing practices, the buyer may place 15% of the purchase price into an 18-month escrow. If a Medicare audit finds improper billing and demands repayment, the buyer claims against the escrow to pay the penalty, protecting their investment, but reducing the final amount the sellers receive.
What related terms should sellers understand regarding indemnification escrows?
Sellers should understand representations and warranties (promises about their practice’s condition), due diligence (the buyer’s investigation to identify risks), and indemnification (the legal promise to cover losses). The escrow is the financial mechanism backing these promises.