I had a seller call me this week to see if I would handle the closing of his business. He had a buyer. They had agreed to the price and terms, and he just wanted to close. I referred him to an escrow company and he didn’t know why he needed to use one.

Do you need an escrow company to assist you when you are selling your business, with or without an intermediary such as a business broker or Investment Banker? In a word, YES!! I will say that larger transactions, over $5M will most likely use an attorney that is working on the deal, but all smaller sales are advised to use an Escrow company that specializes in Business Transactions vs. real-estate deals.

The duties of the escrow company, which is a neutral third party, are not to make any changes to any of the documents until there is agreement from both sides, seller and buyer. They do all the tax clearances request such as BOE, EDD, FTB, and Property Tax-unsecured Tax release. They do a lien search to make sure there is no lien on the business prior to buyer taking it over.

We just had an escrow close a few weeks ago and escrow discovered that the seller owed $5,000 to the EDD and he was unaware of this. Of course, that can be settled through escrow and deducted from the proceeds and escrow pays it for the seller or the seller can take care of that prior to selling. If that hadn’t been caught it would have been the responsibility of the buyer to pay that amount after closing.

In escrow, Buyers and Sellers agree that the full amount of the purchase price or consideration shall be deposited with the Escrow Holder and no funds are to be paid outside of this escrow.

 

Other Escrow Services

Bill of Sale: Buyer and Seller make a joint itemized inventory of all furniture, fixtures and equipment being conveyed and deposit into escrow. Seller executes a good and valid Bill of Sale covering the same, free and clear of any liens and encumbrances to be delivered to the Buyer as of the close of this escrow. The Seller does guarantee to Buyer that all machinery and equipment is in working order as of date of possession by Buyer.

Lease(s): The close of escrow is contingent on Buyer obtaining an Assignment of Lease, or a new lease, to be negotiated outside of escrow. Seller agrees to consent to Assignment of Lease, and Buyer agrees to assume the existing lease and to contact landlord for landlord’s approval of Assignment. If assumed, Seller deposits into escrow a copy of the existing lease, together with the assignment and the consent of the landlord.

Pro Rations and Adjustments: Escrow prorates or adjusts the following based on a 360-day year/30-day month, as of, change of possession

  1. Current Personal Property (571-L) taxes in an amount as show in on the current tax bill. Seller instructs Escrow to pay any unpaid tax bill and penalties due from proceeds due him at closing.
  2. Lease/Security deposit.
  3. Rent paid to be determined prior to the close of escrow.
  4. Utilities, insurance or other deposits to be credited to Seller.

Bulk Sale Notice: File/post a bulk sale notice if it is required

One can clearly see that not using an escrow company can open up quite a bit of liability for the buyer. The escrow cost is shared by buyer and seller and you can call Business and Escrow Service Center in San Jose if you need to get a quote on your upcoming sale. They manage the entire process and you can rest assured that all has been covered and that you are covered with no surprises.

 

If you have any questions, feel free to contact Joan Young, President of Sunbelt Business Brokers, Greater Bay Area – [email protected]. Sunbelt also handles Mergers and Acquisitions.