How does escrow work when selling or buying a business? The process of buying or selling a business has many steps. These can include negotiating with the landlord, arranging third party finance, the buyer conducting due diligence to verify the representations of the seller, the buyer taking over the franchise agreement, the buyer using their 401k money as a down payment to make the purchase of the business and many more.
As the parties resolve each of these steps in the transaction, it moves to a point where local, state and federal laws need to be met for the transaction to legally close, different parties need to provide and sign legal documents and the transfer of money needs to take place. To help all the parties in the transaction, not just the buyer and seller with these processes, the need for the services of an independent party is necessary and the escrow company is the party that offers this service.
So what is the critical service that a good escrow company provides? The answer is simple and that is being a neutral third party. On Tuesday March 05, 2013 Lisa Decker from Fidelity National Title was my guest on my radio show, Money 2.0 on 105.5FM and was able to provide some great information about her role as an Escrow Officer and the work she does for Fidelity National Title. Here are some of the questions and answers Lisa shared with me.
The primary purpose of escrow for a business transaction is the same as the primary purpose for buying or selling a house which is to provide a neutral third party to handle the money and paperwork. However, a business transaction has a different set of laws to follow and generally involves many more parties.
Some of the items to handle in an escrow for a business include getting State agency releases. For example, for an escrow to close the escrow officer will contact the Franchise Tax Board, Employment Development Department and State Board of Equalization. The escrow officer also coordinates the publication of notices of the sale to meet local and state laws, legal papers such as a sellers note, covenant not to compete and Bill of Sale.
Because the escrow officer is a neutral third party they do not negotiate or try to settle any disputes with the parties in the transaction. This includes providing legal advice or resolving a disagreement which is the role of the attorney or business broker in the transaction. The escrow officer also does not notify the sale to the landlord, utilities or insurance companies.
The bulk sale process or Business Opportunity Escrow or Business Asset Sale comes into play when the owner of a business is transferring more than 50% of their assets including inventory. This is a legal requirement and is in place to protect any creditors that may be owed money by the seller of the business by letting them know the current owner of the assets is selling the business and if the creditor is owed money, to get this from the seller before the sale closes as the creditor cannot make a claim against the buyer.
If the escrow includes a Bulk Sale this time frame is about 25 to 30 days. If the escrow includes the bulk sale and transfer of the ABC Liquor License it can increase the time from 45 to 60 days.
If the transaction includes a business and real property it is not necessary to have a separate purchase agreement. However, it will be necessary to have two separate escrows; one for the business and one for the real estate.
The reason for the separate escrow is that they are governed under different requirements to transfer. Both escrows do not need to close concurrently but it’s necessary to take care as each scenario is different.
The costs of an escrow vary according to the purchase price of the transaction and the different fees that apply. Each transaction is unique but before the escrow process starts, the escrow officer can provide a price.
There were many other questions in my conversation with Lisa. If you would like to get more information about the escrow process by listening to our conversation, please click the following link – Lisa Decker from Fidelity National Title
About Andrew RogersonAndrew Rogerson is a 5-time successful business owner, Lifetime Certified Business Broker (LCBB), Certified Business Intermediary (CBI), Certified Mergers & Acquisition Professional (CM&AP), Mergers & Acquisition Master Intermediary (M&AMI), Expert Equipment Certified Appraiser (EECA), and author of 4 books. Andrew gives speaking presentations on request. Andrew helps business owners plan, value and execute selling or buying a business in California with the California Dept of Real Estate.
