In dealing with business sales, often times the seller or the buyer will ask about the use of an escrow company. The seller may say 'Why can't the buyer just pay me cash or give me a cashier’s check'?
Escrow does a number of things during the business for sale transaction that are designed to protect both the buyer and the seller. First, it is important for the seller to know that the buyer's earnest money deposit or good faith deposit actually has some cash behind it. Escrow will deposit the buyer's check and hold these funds in an escrow account until such time as the transaction closes or is cancelled by the buyer and seller.
On occasion, the buyer will discover during the due diligence period that the income of the business was overstated by the seller. The buyer may decide that the business will not generate sufficient cash flow for his/her needs and may choose to cancel the transaction. If the buyer has given the seller a cashier's check or cash as a deposit, there may be substantial difficulty in getting the deposit back. However, it is generally a simple process to have the deposit funds returned by Escrow.
It is important for the buyer to know if there are any liens against the business and if so to ensure they are paid by the seller. Escrow orders UCC searches to see that the seller doesn't have other liens or encumbrances against the assets of the business. Imagine if a buyer simply handed over a cashiers check for $200,000 only to find out six months later that there was an outstanding lien for $125,000 that had been recorded against the assets of the business. Additionally, Escrow ensures that a "Notice to Creditors of Bulk Sale" is published so that any other creditors can file any claims they may have against the business or the seller prior to the transaction closing. All of this is done to protect the buyer in the transaction.
The buyer's funds have to be deposited into escrow several days prior to the closing date. The funds may come from a lending institution, cashiers check, wire transfer. However, typically the funds are required a few days in advance. This is to protect the seller. There have been situations where buyers have paid sellers directly with cashier’s checks and then proceeded to the bank to stop payment. Since escrow requires the funds in advance, it prevents this type of situation from occurring.
There are many other benefits to using an escrow company and most legitimate business brokers will not be involved in transactions where buyers and sellers are transferring funds directly between themselves.
It is always a good idea to have an objective third party hold the funds, make sure there are no additional encumbrances against the business and make sure both the buyer and seller are in agreement on closing prior to releasing funds. After all, once the funds have been disbursed, there's no going back.
About: Peter Siegel, MBA is the Founder & Senior Advisor (ProBuy & ProSell Programs) at BizBen.com (established 1994, 8000+ California businesses for sale, 500 new & refreshed postings/posts daily) working with business buyers, small business owners/sellers, business brokers, agents, investors, and advisors. Reach him direct at 866-270-6278 to discuss strategies regarding buying, selling, (or financing a puchase of) California small to mid-sized businesses.
|Helpful Resources To Assist In Selling And Buying California Businesses|
|Elizabeth McGovern: Escrow Services - SF Bay Area
McGovern Escrow Services, Inc., is a leading independent escrow company. We are a trusted partner with our clients, assisting them through the tangled bulk sale & liquor license transfer process. We provide attentive, quality & innovative customer service. Phone Elizabeth McGovern at 415-735-3645.
|Brad Steinberg, Broker - Laundromat Specialists
Laundry specialists - founded in 1968 by three laundry professionals, PWS is a family-owned corporation. Through the years it has grown to become the largest vended laundry equipment distributor in the United States. Call Brad Steinberg at 323-721-8832 to sell or buy a coin or card laundromat.
|Willard Michlin, CPA, Certified Fraud Examiner, Due Diligence Services
Willard Michlin, CPA #106752, offers buyers step by step training & assistance in doing Due Diligence Services when they are thinking of making an offer, or are in process of investigating a business purchase. He helps to determine the actual net profit even when there is cash. Call 800-864-0420.
|Diane Boudreau-Tschetter: Escrow And Bulk Sale Services
California Business Escrow, Inc. is a full service independent escrow company serving all of California and has expertise in a wide range of escrows. Our team prides itself on providing an exceptional escrow experience. For more info phone Diane Boudreau-Tschetter at 888-383-3331 or 209-838-1100.
|Mark Chatow, Esq.: Legal Services For Buying, Selling Businesses
Mark has a broad range of small business purchase & sale experience from analyzing potential acquisition targets to successfully guiding buyers and sellers through the purchase & sale of small businesses. Mark can assist with contracts, negotiations, legal matters, etc. Reach Mark at 949-478-8393.
|Helen Yoo: Escrow & Bulk Sale Services - Southern California
New Century Escrow, Inc. is a fully licensed & bonded independent escrow company. Over 20 years combined experience in handling bulk escrow transactions. Multi-lingual staff that speaks your language, including Korean, Chinese, Vietnamese. Call Helen Yoo direct at 626-890-1151.
|Janet Carrera - Escrow & Bulk Sale Services - SF Bay Area
Redwood Escrow Services, Inc. is a full service, licensed independent escrow company. We are EAFC Fidelity bonded, fully insured & licensed with the Department of Corporations. Committed to offering our clients the most comprehensive variety of escrow services available. Phone Janet at 510-247-0741.
|Related Articles, Events, Blog Posts, Discussions, Videos, Interviews|
|Financing A Business Purchase With Limited Or No Real Estate Collateral
In my experience working with the "right banks and financial institutions" repayment ability sometimes overrules collateral pledged by someone needing financing for a business purchase or a down payment. Peter Siegel, MBA (Business Purchase Financing Expert) at 866-270-6278 shares his experience.
|Why Deals Fall Out: Unrealistic High Asking Prices Are Usually The Reason
The unfortunate truth is that approximately 50% of all small business sales transactions fall out. While failed transactions can happen for a many reasons, Peter Siegel, MBA (BizBen Director & Business Purchase Financing Expert) discusses the main reason deals fall through; steep asking prices.
|Financing Advice: Showing Add Backs To Get Business Acquisition Financing
When seeking business acquisition financing, it helps to review a seller's addbacks as a source of funding to service the debt service. But explain them correctly. Peter Siegel, MBA business acquisition financing expert and advisor at 866-270-6278 covers this topic on financing a business purchase.
|How To Determine Whether The Buyer For Your Business For Sale Is Sincere
A problem owners encounter when offering a CA business for sale is that not all so-called business buyers are qualified to make the purchase. It's frustrating and costly to waste time showing non-qualified buyers the business. Here are ways to identify time wasters so the focus is on real buyers.
|Absentee Run Businesses - A Myth Or Reality When Buying A Small CA Business?
Some buyers search for an absentee business to own, wanting to collect profits generated by a successful enterprise without having to stand at the sales counter or cash register, without having to cook, operate equipment or talk to customers. Here's some insight about finding such a business.
|Should I Buy A Business That is Losing Money? Feedback From Top Advisors
Are businesses worth taking a look at when they are losing money? Multiple Advisors & Business Brokers weigh in on this topic and say yes! (but be careful) on a BizBen Discussion. Some great feedback on this topic will make potential business buyers (and money losing sellers) want to read this info!
|BizBen Index: Weekly Results - 221 California Businesses Sold 1/23 - 1/27
For the week of 1/23 thru 1/27, 221 CA businesses were sold by business owners, business brokers, and agents. In 2016 16,858 CA businesses have been sold. Last year (2016) 16,858 businesses sold in CA.
|4 Reasons Why Business Brokers Do Not Cooperate With Other Brokers & Agents
Despite challenges in the business for sale marketplace, some of the business brokers who make a living by facilitating a deal between buyer and seller are known to stand in the way of a completed transaction because of some outdated ideas. Too bad they put greed ahead of the needs of their clients.
|See All News, Tips And Events|