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 and arranging third-party finance. The buyer may also conduct due diligence to verify the seller’s representations. If the business is a franchise, the buyer can discuss taking over the franchise agreement. The buyer can also use their 401k money as a down payment to buy the business, plus other steps.
As the parties resolve each of these steps in the transaction, it moves to a point where local, state, and federal laws must be met so the sale of the business can close. This includes the different parties that 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 critical service does a good escrow company provide? The answer is simple: 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. She provided 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.
Is the escrow for selling a business different from the escrow for selling a house?
The primary purpose of escrow for a business transaction is the same as the primary purpose for buying or selling a house: 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.
What do you handle in escrow?
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 different Federal and California State Agencies. For example, the Franchise Tax Board, the Employment Development Department, and/or the State Board of Equalization. The escrow officer also coordinates the publication of notices of the sale to meet local and state laws and legal papers such as a seller’s note, covenant not to compete, and a Bill of Sale.
What do you not handle in escrow?
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.
What is the Bulk Sale process, and why is it used?
The Bulk Sale process is also called the Business Opportunity Escrow. The Bulk Sale process comes into play when the owner of a business is transferring more than 50% of their assets. This includes inventory. This is a legal requirement of the State of California. It is in place to protect any creditors that the seller of the business may owe money. That is, the bulk sale process requires advertising the change of ownership of the business. This then allows creditors who may have money due to them to get this from the seller before the sale closes.
How much time does escrow take?
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.
Can the same escrow include a business and real property?
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.
What are the costs of an escrow service?
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
