Understanding escrow for business sales is very important.
The escrow process involves hiring an escrow company to act as a neutral party while protecting the buyer’s funds. In addition, the escrow process requires receiving essential legal and business documents from the parties for escrow to close.
Escrow for Business Sellers
As a business owner, you need to know how the escrow process works when you sell your business. Escrow helps your business sale by protecting both you and your buyer so both parties feel secure at its conclusion.
The most important thing escrow accomplishes is securing the funds until the sale transaction concludes. The escrow officer follows the conditions set forth in the Business Purchase Agreement. Every party must meet their contractual obligations for escrow to close.
No matter what type of business you sell or purchase (from a bargain basement store to a high-tech company) escrow provides both parties with a safe and secure manner to complete the sale.
Complex Business Escrow Processes
Often, the transaction requires specific complex actions to be completed before settlement occurs.
Sometimes, the purchase contract requires expanding the business or purchasing another property, or purchasing expensive equipment, or conducting a technical analysis before a sale completes. The escrow officer ensures that every step occurs before the transaction concludes. This might entail conducting separate escrows for each purchase described above.
For example, if the transaction depends upon the seller acquiring another property to be included in the original purchase, a separate escrow occurs for that specific purchase. Another example involves the seller buying additional equipment demanded by the buyer to complete the sale. A separate escrow opens for the purchase of the equipment.
Therefore, the escrow process ensures all required actions occur before escrow closes.
In addition, at times both parties must perform specific actions for the business sale to finalize. In such circumstances, the escrow process ensures both parties completed their obligations before the transaction finalizes.
Other times, the business purchase includes items outside of the business itself. Aside from the additional real property and equipment mentioned above, the buyer must also purchase separate business assets. For instance, legal rights (copyright, patents, trademarks, etc.) sold separately. These require separate escrows.
Escrow for Business Sellers and Buyers Provides Security
Business purchasers must feel secure that their funds will be protected during the escrow process. At times, large amounts of cash or swapping ownership of various essential items requires delicacy and caution.
Avoid the risk of a business seller running off with your money without transferring title to the business by using an escrow company.
Business sellers must also feel secure that the buyer’s funds held by the escrow company will become available when the sale completes.
Avoid risking the sale of a business for a song instead of cash by using an escrow company.
Small Business Escrow
Small business owners have a lot to lose if a buyer pulls off a scam. Forged checks, fake securities, even counterfeit money pop up in small business sale transactions. Swapping title to real estate for the title to a business often contains risks. That’s why using an escrow company protects small business owners.
Making buyers deposit funds into a safe and secure escrow account limits the risks to small business sellers.
Business Escrow Keeps Both Parties Safe
Not releasing the funds until the buyer and seller fulfill their obligations under the business purchase contract protects both parties.
Everyone involved in the business sale transaction deserves to get everything they were promised.
Escrow companies depend upon the buyer and the seller to draw a list of items they require to be completed before the funds and title transfer to the other party. Typically, the business purchase contract lists the terms, conditions, and obligations of both parties. However, not every business sales contract is perfect. That’s why the escrow officer creates specific “escrow instructions” which lists the items for completion that both the buyer and seller acknowledges.
Dealing with Buyer’s Lender
Another important party to the sale and purchase of a business is the buyer’s lender. Most often, the buyer lacks the total funds to complete the purchase. Therefore, the buyer applies for financing from a lender. Now, a new third party appears on the scene to become actively involved with the escrow process.
Just like a mortgage lender for a home, the lender wants assurances that the business values at the sales price. This requires hiring business valuation experts to determine the fair market value of the business and its assets. If the value is less than the sales price, the purchase may be called off if not renegotiated at a new price by the parties.
Different Business Escrow Accounts
Business loans often need specific escrow accounts. The lender requires a business escrow account to transfer the funds only to be released upon certain actions by the debtor.
Other business escrow accounts involve the transfer of assets from a buyer. That’s because buyers may partially pay for a business with his or her own assets. However, the seller may not wish to accept title to the assets without first confirming their value.
Therefore, the escrow company holds title to the assets to prevent the buyer from selling them or using them as collateral for a loan. In the meantime, the seller hires experts to evaluate the assets to determine their fair market value. Only after the seller approves the assets does the escrow officer transfer title to the seller.
Construction loans work in a similar manner. The lender opens an escrow account releasing funds after certain phases successfully occur. A construction project may involve five stages where each one pays out a specific amount of funds after the lender approves each stage of the construction work.
Bulk Sale Escrow
A bulk sale escrow involves a Business Asset Sale and/or a Business Opportunity Sale. These two types of business escrow occur when a business owner sells 50% or more of his or her assets. But, not the entire ownership. This also includes inventory.
The Bulk Sale Escrow process protects any creditor’s owed money by the seller by informing them of the assets sale so they can file a claim against the buyer before the sale closes. Thus, the buyer forces the seller to pay off all of the creditors before the sale closes.
Understanding escrow for business not only includes the sale of a business but other types of business escrow services.
For instance, business escrow accounts open for separate purchase and sales of real property, equipment, other assets, and legal rights within the same business sale.
Business escrow accounts open because lenders require them. Different types of business escrow accounts exist. For instance, construction loans require a business escrow account paying out specific amounts after each stage of a construction project.
In addition, bulk sales escrow exist to protect current creditors of the seller who must get paid before the sale closes.
Contact Us no matter what type of business escrow services you need.
Steven Rich, MBA – Guest Blogger
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Open Escrow – California Escrow Company