One escrow account was supposed to simplify a forty-million-dollar deal

The situation

'How is there only one pot of money for two completely different problems?' Dong-hyun asked that question about four months after closing, once it became clear that a working capital shortfall and a separate indemnity claim were both going to draw from the same escrow account, and there might not be enough in it to cover both in full.

Ji-ho and Dong-hyun had built a network of physiotherapy clinics across eastern Ontario over more than a decade. Mihaela, a software developer, had joined a few years in to build the scheduling and billing platform that eventually became a product the clinics licensed out to other practices. The three of them restructured the business around that platform, and by the time they were looking to acquire a mid-size medical equipment distributor, the combined company was doing well enough to fund a deal in the thirty to fifty million dollar range largely through a mix of debt and reinvested profit.

The distributor they acquired supplied equipment to clinics and small hospitals across the region. The deal included a standard working capital adjustment, reconciling the target's actual working capital at closing against a target figure, and standard indemnity protection covering breaches of the seller's representations, things like undisclosed liabilities, misstated inventory, or contracts not properly assigned.

Early in negotiations, the seller's lawyers proposed a single escrow account to secure both obligations, rather than the two separate accounts, one for adjustment and one for indemnity, that are more typical on a deal this size. The seller argued this saved on escrow agent fees and simplified administration. Ji-ho and Dong-hyun, keen to keep the deal moving and comfortable that both claims seemed unlikely, agreed to the single blended account over our initial recommendation to keep the two pools separate.

We had made the case for separate accounts plainly at the time: an adjustment claim and an indemnity claim behave differently, resolve on different timelines, and a blended account risks one eating into the other if both happen to arise. Ji-ho pointed out, reasonably, that the seller was a long-established company with a clean reputation in the region, and that the escrow fee saving, while modest in absolute terms, was one of several small concessions helping keep negotiations on friendly footing. It was a judgment call, made with full information, not an oversight. It just turned out to matter more than anyone expected.

Why this was harder than it looked

A separate escrow structure exists for a reason that only becomes visible when something goes wrong. A working capital adjustment is usually resolved quickly, within a few months of closing, through a defined accounting process with a dispute mechanism if the parties disagree on the numbers. An indemnity claim can take much longer to surface and resolve, sometimes stretching well past the point the adjustment has already been settled. Keeping them in separate accounts, with separate release schedules, means an early adjustment payment does not draw down the pool that later needs to cover a slower-developing indemnity claim.

With one blended account, both claims were drawing against the same fund, and the adjustment claim resolved first. By the time the indemnity issue, a set of vendor contracts that turned out to include pricing commitments not disclosed during diligence, was fully quantified, a meaningful portion of the escrow had already been released to cover the working capital shortfall. What remained was not enough to cover the indemnity claim in full.

The complication deepened when the seller's counsel challenged the timing of the indemnity claim itself. The purchase agreement set a notice period for indemnity claims, and the seller argued Ji-ho, Dong-hyun and Mihaela had known about the pricing issue earlier than the formal notice suggested, which would have put the claim outside the window the agreement allowed. This is where the file became genuinely difficult. Internal emails produced during the dispute showed that Mihaela had flagged an odd pattern in vendor invoicing to the operations team roughly six weeks before the formal notice was sent, in language that, read plainly, suggested she suspected something was off well before the date the claim relied on.

This was not dishonesty. It was the ordinary gap between an operational team noticing something looks strange and a legal team confirming it rises to an indemnifiable breach. But the seller's lawyers did not need to prove dishonesty, only that the client's own account of when they discovered the issue did not match the client's own paper trail, and that gap became the center of gravity for the entire negotiation.

It did not help that Mihaela, when first asked about the email, initially described it as a passing comment she barely remembered making. Once the message itself was pulled and read back to her, she recalled the exchange clearly and did not dispute what it said, but the brief mismatch between her first recollection and the actual record was the kind of small inconsistency that a well-prepared opposing counsel notices and uses, even when nothing dishonest was intended.

What we did

1. Reviewed the full internal record before taking a position, not after. Rather than assert a discovery date and defend it, we asked for and reviewed all relevant internal communications first, so we understood exactly what the seller's counsel would eventually find and could shape the client's position around the real record rather than around a preferred version of events. Finding the six-week email ourselves, before the seller's lawyers raised it, meant we were never caught reacting to a surprise mid-negotiation.
2. Modelled the escrow shortfall before responding to the seller. We built a simple ledger showing exactly what had already been released for the working capital adjustment against what remained in the account, so the negotiation started from an agreed set of numbers rather than a dispute over how much money was actually left to argue about. Settling that arithmetic first kept the actual conversation focused on allocation and value, not on competing versions of the account balance.
3. Reframed the six-week email as operational suspicion, not legal discovery. We built the argument around the genuine distinction between an employee noticing an anomaly and the company having enough information to know it had a viable claim, supported by a timeline showing what additional facts emerged between Mihaela's note and the formal notice. That timeline gave the distinction real evidentiary weight instead of leaving it as an assertion the seller's counsel could simply dismiss.
4. Negotiated an allocation formula for the remaining escrow rather than a winner-take-all fight. With limited funds left in the blended account, we proposed splitting the remainder between the two claims proportionally to their assessed value, avoiding a drawn-out dispute over which claim had priority when the agreement itself was silent on the question. A proportional formula gave both sides a principled basis to agree on rather than forcing a fight neither side was certain to win outright.
5. Pursued the shortfall beyond escrow through the general indemnity cap. The purchase agreement did not make escrow the sole and exclusive remedy for indemnity claims, so the general indemnity cap remained available. We advanced the balance of the indemnity claim directly against the seller up to that cap, rather than treating the exhausted escrow as the end of the matter, which recovered real value the blended-account structure alone would have left on the table.
6. Prepared the client for the credibility cost of the internal record. We were direct with Ji-ho, Dong-hyun and Mihaela that the six-week gap would weaken their negotiating position regardless of how it was framed, and that factored into our recommendation to settle on reasonable terms rather than push the notice-timing dispute to a formal proceeding where the record would be tested more harshly.
7. Documented a clear lesson for future deals in the settlement file itself. We recorded, as part of the client's internal deal file, the reasoning for recommending separate escrow accounts going forward, so the next acquisition would not repeat the structural choice that made this dispute harder to resolve than it needed to be. Putting the lesson in writing, rather than leaving it as something the principals simply remembered, meant it would survive even if none of them personally handled the next deal.
8. Coached the client on consistent, careful answers for the negotiation itself. Before any further exchanges with the seller's counsel, we walked Ji-ho, Dong-hyun and Mihaela through exactly what the internal record showed and helped them prepare answers that were accurate and consistent with it, so no further small inconsistencies emerged to compound the notice-timing dispute already in play. One early stumble on the facts had already cost credibility, and a second one would have cost far more.

The outcome

The dispute settled without a hearing. The remaining escrow funds were allocated primarily to the indemnity claim, with a smaller portion applied to closing out the working capital adjustment, and the seller agreed to pay an additional amount outside escrow, drawn against the general indemnity cap, to bring the total recovery to a level that reflected the underlying value of the pricing issue rather than the amount that happened to still be sitting in the account.

It was not a full recovery. The notice-timing dispute, driven by Mihaela's early internal note, gave the seller enough leverage to negotiate the additional payment down from what the claim would likely have been worth if the notice question had not existed. The client absorbed that gap rather than testing it in a formal proceeding, a judgment call made with the risk of a worse outcome in mind. Ji-ho and Dong-hyun were candid, in a debrief a few weeks after the settlement, that the hardest part had not been the money itself but the discomfort of watching a colleague's ordinary, well-intentioned note get treated as a liability. That discomfort, more than the dollar figure, is what stayed with them longest.

The structural lesson outlasted the dispute. On the acquirer's next transaction, completed roughly a year later, the escrow was split into two accounts from the outset, adjustment and indemnity kept separate, with distinct release schedules. Ji-ho put it plainly in a later meeting: the fees saved on one escrow account the first time around were a small fraction of what the blended structure ended up costing them in the fight over money that had already left the account.

Mihaela, for her part, took a specific lesson from the file that had nothing to do with escrow mechanics: she changed how she flagged operational concerns internally afterward, routing anything that might eventually matter through a dated, written note to a shared file rather than a quick message to a colleague, precisely so a future timeline would not depend on anyone's memory of when a conversation happened.

What you can learn from this