Warranty insurance or a holdback: what does each cost the seller?

A classic holdback costs the seller no fee, but it keeps a slice of the price out of reach for a year or more and leaves that slice exposed to the buyer's claims; warranty insurance replaces most of that slice with an insurance policy, at the price of a premium that either the buyer or the seller pays. On a $60 million sale worked through below, the holdback costs the seller about $450,000 in time value on $6,000,000 held for 15 months, a buyer-paid policy costs the seller about $9,000, and a seller-paid policy about $229,960.

The product has two names. In the United States it is representations and warranties insurance, often shortened to RWI; in the United Kingdom, continental Europe and Asia it is warranty and indemnity insurance, or W&I. The mechanics are the same, the market figures are not, and both sets are given here with their source and year. Tax treatment of premiums and of held amounts depends on the country and on your own position, so the numbers below are before income tax and are general information, not legal or tax advice.

What does each structure protect the buyer against?

A holdback and a warranty insurance policy protect the buyer against the same thing: a loss caused by a statement in the sale agreement that turns out to be untrue. The difference is whose money stands behind the promise, the seller's own proceeds in one case and an insurer's balance sheet in the other.

When you sell a company you sign a long list of statements about it: the accounts are accurate, the taxes are filed, the contracts are in force, nobody is suing. If one of them is wrong and the buyer loses money, the agreement gives the buyer a right to be compensated, up to a cap and for a limited period. A holdback or an indemnity escrow is simply a way of making sure the money is there when that right is used: part of the price is not paid to you at closing and waits, either with the buyer or with an escrow agent, until the period ends.

Warranty insurance covers the same statements. The buyer is the insured in almost every case; in Marsh's 2024 review of its Asian placements, 94% of policies were buyer-side and 6% seller-side. If a covered statement proves untrue, the buyer claims on the policy instead of on your proceeds. What the buyer gets in addition is usually more cover for longer: Lockton's 2025 market update describes a typical policy term of three years for general representations and six years for tax and fundamental ones, which is longer than most sellers will leave money on the table.

How does each one change the seller's cash at closing?

A classic holdback takes roughly a tenth of the price out of the seller's closing payment, while an insured deal typically leaves a small fraction of one percent held, or nothing at all. That gap, not the premium, is the main reason sellers ask for insurance.

SRS Acquiom, which acts as shareholder representative and paying agent on private company sales, measured the gap in its 2025 report on deals closed in 2024. The median general indemnification escrow was 10.0% of transaction value on deals without warranty insurance and 0.35% on deals with it. Counting every escrow in the deal, including those set up for price adjustments and specific issues, the medians were 11.3% without insurance and 2.1% with it. The same study found insurance on 42% of 2024 deals.

The small amount that remains held in an insured deal is usually the seller's share of the policy's retention, which is explained in the pricing section below. In a growing share of deals even that disappears: Lockton estimates that 65% of its placements in 2024 and 2025 were built with no seller indemnity at all, meaning that, fraud aside, the policy is the buyer's only recourse for a breach of the general statements.

How is warranty insurance priced?

Warranty insurance is priced as a percentage of the limit of cover bought, not of the purchase price, with a one-off underwriting fee and premium taxes on top. The second number that matters is the retention, the deductible that has to be used up before the insurer pays.

Three points sit behind the table. First, the rate applies to the limit, so a 2.9% rate on a limit equal to 10% of the price costs 0.29% of the price in premium.

Second, the gap between the American and British figures is structural as much as it is a matter of price. British and European policies are bought with much larger limits relative to deal value and lower retentions: Marsh reports an average UK retention of 0.31% of enterprise value in 2024, down from 0.36% in 2023. In North America, Marsh puts the average initial retention below 0.6% of enterprise value on deals above $50 million and at about 0.7% below that size.

Third, premium is taxed. In the United States a policy of this kind is commonly placed with a surplus lines insurer, and the state of the insured charges a surplus lines tax and fees that vary from state to state; the worked example below uses an illustrative 4% of premium. In the United Kingdom, HM Revenue and Customs applies insurance premium tax at the standard rate of 12%. As an illustration in sterling, on a £50 million sale insured for 38% of its value, the limit is £19,000,000, a 1.1% premium is £209,000 and the 12% tax adds £25,080.

Prices move: CBIZ, writing in 2025, put North American pricing at 2.5% to 3% of the limit, down from about 5% in early 2022. A quote is the only figure that counts for your deal, and SRS Acquiom's guide indicates that non-binding quotes typically come back in two to four business days.

Who usually pays the premium?

The buyer pays the premium in most insured deals today, but the point is negotiable and the seller pays in a meaningful minority of cases. Whoever writes the cheque, the cost can also travel through the price.

Woodruff Sawyer, an insurance broker, tracked this in its own client data on mid-market technology deals in the United States worth between $27 million and $2 billion. The share of deals in which the buyer paid the whole premium rose from 45% in 2018 to 83% in 2025, with the seller paying in about 17% of deals in 2025, and split premiums had all but disappeared by 2021. The broker itself warns that this dataset is not a proxy for the whole market, and older practice was different: law firm guides written before 2020 describe an even split as the usual outcome.

The retention is a separate negotiation. In the same data, the buyer carried the whole retention in 61% of deals in 2025, against 7% in 2019. Where the buyer does not carry all of it, the seller funds part of it through a small escrow, and SRS Acquiom notes that a seller may be responsible for half or more of the retention.

In an auction with several bidders, a seller can ask every bidder to price on the basis that the buyer insures and pays; in a one-to-one negotiation, expect the buyer to count the insurance cost somewhere in the offer.

What stays with the seller even with insurance?

Insurance does not remove the seller from the picture: the seller normally keeps a share of the retention, full exposure for fraud, and every risk the policy excludes. An insured deal moves the unknown risks to the insurer and leaves the known ones where they were.

The retention share is the visible part. It matters more than its size suggests, because small claims are the common ones: in SRS Acquiom's data, 61% of claims on insured deals fell solely within the retention, which means they never reached the insurer and were settled between the buyer and whatever the seller had left in escrow.

The exclusions are the less visible part. SRS Acquiom's guide lists the common ones as known or expected breaches, purchase price adjustments, breaches of covenants, forward-looking statements and projections, underfunded pension plans and the availability of tax losses. British guides add bribery and corruption and environmental claims as frequent exclusions. On top of the standard list, an underwriter can exclude a specific matter that the buyer's due diligence did not cover well enough. For each excluded matter the buyer has a choice: accept the gap, or ask you for a specific indemnity backed by its own held amount. That is why an insured deal can still carry an escrow well above the retention share, and why the SRS Acquiom median for all escrows on insured deals, 2.1%, is six times the median for the general escrow alone.

The disclosure work is the same under both structures: a breach the buyer's deal team knew about before signing is excluded, and a breach the seller knew about and hid is what the fraud exception is for.

What do the three structures cost on a $60 million sale?

On a $60 million sale with the assumptions below, the classic holdback costs the seller about $450,000, insurance paid by the buyer about $9,000 and insurance paid by the seller about $229,960. The seller also has $6,000,000 exposed to claims for 15 months under the holdback, against $150,000 for 12 months under either insured structure.

This is a worked example, and every assumption is stated so you can replace it with your own.

• Price: $60,000,000, paid in cash, no earn-out.
• Classic holdback: 10% of the price, $6,000,000, in line with the SRS Acquiom median for uninsured deals, held for an illustrative 15 months.
• Policy limit: 10% of the price, $6,000,000, in line with the Marsh median for North America.
• Premium: 2.9% of the limit, $174,000. Underwriting fee: an illustrative $40,000. Surplus lines tax and fees: an illustrative 4% of premium, $6,960. Total insurance cost: $220,960, which is 3.68% of the limit and 0.37% of the price.
• Retention: 0.5% of the price, $300,000, falling to 0.3%, $180,000, after an illustrative 12 months. The seller funds half of the initial retention, $150,000, through an escrow released at 12 months; the buyer absorbs the other $150,000.
• Time value: an illustrative 6% a year, simple, on any amount held, net of whatever interest the held account earns for the seller. Use your own rate: the return you would earn, or the borrowing cost you would avoid, with the money in hand.

Cash at closing is shown before the other deductions every sale carries, such as debt repayment, the working capital adjustment and transaction fees, which are identical in the three columns.

The money cost row counts only what is certain, fees paid and time lost, and leaves out the chance that part of the held amount never comes back. SRS Acquiom reports that 28% of all the deals in its data received a claim notice. Under the holdback, any such claim is argued against $6,000,000 of your money; under the insured structures, your stake stops at $150,000 unless the claim falls in an exclusion or involves fraud.

Two readings follow from the numbers. Paying the whole insurance bill yourself still leaves you $220,040 better off than the holdback on time value alone, and with $5,629,040 more in hand on closing day. And where the buyer pays, the saving of $441,000 is the most you should give back in price to get the insured structure, if time value were the only thing you cared about; the reduced exposure is worth something on top of that.

When is warranty insurance not available or not worth it?

Warranty insurance stops making sense when the fixed costs of a policy exceed what the holdback would cost the seller, which happens on small deals, and it does not help with problems that are already known. It can also be unavailable, or available only with wide exclusions, when the buyer's due diligence is too thin for an underwriter to rely on.

Size is the first limit. Insurers have moved down-market: Lockton's 2025 update says policies are often available at enterprise values as low as $10 million, and Marsh reports that deals of $50 million and below made up 27% of its closed North American placements in 2024. But a policy has a floor on its cost, because insurers apply a minimum premium whatever the limit and the underwriting fee does not shrink with the deal. No current published figure for that minimum was found for this article, so ask the broker for it before anything else.

Run the worked example again at a smaller price to see the effect. On an $8,000,000 sale, a 10% holdback is $800,000, and 15 months at 6% costs $60,000. A limit of 10% of the price would also be $800,000, a size insurers rarely write; a 2019 guide by the law firm Dykema described a policy below $3 million of limit as unusual. Take that $3,000,000 limit as an illustration: at 2.9% the premium is $87,000, and with a $40,000 fee and 4% tax of $3,480 the bill is $130,480, more than twice the time value of the holdback. The buyer gets more cover for that money, but if you are the one asked to pay, the holdback is the cheaper structure.

Known problems are the second limit. A tax assessment under way, a dispute with a former employee, a licence that may not transfer: the policy excludes what the parties know, so each of these still needs a price reduction or a specific indemnity with its own held amount. If most of the risk in your company is of this kind, insurance changes little.

Diligence is the third. The underwriter works from the buyer's due diligence reports rather than repeating the work; CBIZ notes that some carriers will accept diligence done in-house by the buyer, with a trade-off in the breadth of cover. A buyer who does light diligence may not be insurable on useful terms.

Finally, some buyers simply prefer a holdback. A buyer who intends to keep you as a manager may want a direct claim against you as a matter of alignment, and a buyer with no experience of the product may not want to learn it on your deal.

How do you raise warranty insurance in the letter of intent?

Raise warranty insurance in the letter of intent, before exclusivity is granted, because the indemnity structure is far harder to change once the price is fixed and the buyer is the only bidder. The letter does not need the full terms, only the five points that decide who bears what.

Keep the wording on fraud and on the definition of loss consistent between the letter, the sale agreement and the policy. Mismatches between the three documents are where an insured deal produces surprises later.

What happens at claim time under each structure?

Under a holdback the buyer claims against the seller's own held money and the two sides must agree, or go to the dispute process, before any of it moves. Under insurance the buyer claims against the insurer once the retention is used up, and the seller is mostly a bystander.

The practical difference for the seller is the release date. A claim notice against a holdback, even a contested one, normally freezes the claimed amount beyond the planned release until it is resolved. SRS Acquiom's data on resolution times gives an idea of the wait: the median claim across all its deals was resolved in 2.8 months, and the median disputed claim in 8.7 months. In an insured deal, a claim above the retention is a matter between the buyer and the insurer, and your proceeds are already in your account.

The practical difference for the buyer is who has to be convinced. A claim on a policy goes through an insurer's claims process, with a proof of loss and a coverage review. A 2023 survey by the law firm Lowenstein Sandler found that 51% of respondents who had received a payment said it took one to three years. Buyers who have lived through that weigh it against the larger and longer cover the policy gives them, and it is one reason the frequency of claims does not fall when insurance replaces the seller: SRS Acquiom counts a claim notice on 31% of insured deals, against 28% of all deals.

Founders often stay on after the sale, as employees or as holders of rolled-over shares. A claim against a holdback puts the buyer and the founder on opposite sides of a negotiation over the founder's own money. A claim on a policy does not, which is a benefit that appears in no table.

How should a seller compare the two offers?

A seller compares the two offers by converting each into the same three numbers: cash on closing day, the amount still exposed and until when, and the certain cost in fees and time value. The offer with the higher headline price is not always the one with the better three numbers.

Start from the buyer's draft and fill in the worked example with real terms: the holdback percentage and its release date on one side; the limit, the quoted premium, the fee, the tax, the retention and your share of it on the other. Then set your own time value. A founder who will leave the money in a deposit account has a low rate, and the holdback costs little beyond its risk. A fund that must return capital to its investors, or a founder with a use waiting for the money, has a high rate, and at 10% a year the $6,000,000 holdback of the example costs $750,000 over 15 months instead of $450,000.

Then look at what the insured offer leaves out. An insured structure with three specific indemnities and a 5% special escrow is not the structure in the middle column of the table. Count every held amount, whatever its label.

Last, remember that the two structures are not exclusive. A reduced holdback of a few percent combined with a policy above it, or a holdback for the tax statements and insurance for the rest, are common outcomes of a negotiation that started with one side asking for all of one and the other for all of the other. The three numbers work on any mixture.