Putting together a buyside model. Was asked to look at returns of an investment at $50mm with $10mm cash escrow requirement. How would that affect my IRR? Would it lower initial equity investment? What about the exit? And would it change anything in my DCF? Thnx

As a buyer, you will require the seller to set aside a portion of the purchase price in escrow to cover any claims that arise post-close (violations of reps & warranties made in the purchase agreement). This generally won't impact your IRR as you are still putting the same amount of capital into the deal. As a seller, you will be required to set aside a portion of your proceeds into escrow. You would show proceeds excluding escrow amount at the time of close and then further proceeds from release of the escrow (timeframe is a negotiated point, I've seen anywhere from a year to 2 years).

How does an escrow requirement impact IRR? And Valuation?

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How does an escrow requirement impact IRR? And Valuation?

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