What is the primary purpose of an escrow account in a Mergers and Acquisitions deal where part of the cash offer is held?

An escrow account in a Mergers and Acquisitions deal serves a crucial function by holding part of the cash offer to offset potential damages arising from seller misrepresentation. This mechanism protects the buyer by ensuring that funds are reserved to address any claims or liabilities that may arise post-transaction due to inaccurate representations or warranties made by the seller during the negotiation process.

In this context, if the buyer discovers that the seller misrepresented key aspects of the business—like financial statements, operational risks, or legal liabilities—they can access the funds held in escrow to cover losses or expenses associated with these misrepresentations. This arrangement provides a level of security and trust in the transaction, allowing the buyer to have recourse should any issues surface after the deal is finalized.

The other options are less relevant in this context. For instance, while financing operations or funding future expansions may be important aspects of a business's overall strategy, they do not pertain to the specific purpose of an escrow account in M&A deals. Similarly, using escrow as a negotiation tool is not its primary function; its role is more about safeguarding interests and ensuring equitable treatment for both parties involved in the transaction.