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Buying A Business: What Should Be Included In Escrow Instructions?

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Comments & Replies: 2     Views: 748     Posted By: Mark Chatow  

Once you have successfully negotiated the Asset Purchase Agreement ("APA") for your acquisition it's natural to relax a little and let your guard down. Attorney Specialist Mark Chatow discusses what business buyers should look out for when opening escrow and getting escrow instruction in place.

Topics: Buying A Business, Escrow Closing Issues, Selling A Business     Tags: buying a business, deal structures, escrow bulk sales, selling a business



Once you have successfully negotiated the Asset Purchase Agreement ("APA") for your acquisition it's natural to relax a little and let your guard down. But it's still important to carefully review every document you receive for signature from the broker or escrow.

One of the most common places I have been finding potential problems in transaction documents lately is the Escrow Instructions. While they seem to be an afterthought for many buyers and sellers, Escrow Instructions are important documents and formalize the agreement between the buyer, seller, broker and escrow. When not properly drafted, escrow instructions can create critical problems.

For example, I represented the buyer in one recent transaction. I had carefully revised the APA to make sure that the seller was making the representations and warranties as to the assets and the business we needed to protect the buyer. In one particular representation the seller represented that the financials fairly and accurately portrayed the business' financial position as of their dates.
But when escrow sent out the Escrow Instructions, they had decided (without asking either party) to include a provision where the buyer acknowledged that they were not relying on the financials in deciding to purchase the business.

If it turned out that the Seller had intentionally misrepresented the financials we'd typically have a claim against them for fraud. But a fraud claim for misrepresenting the financials requires that the buyer reasonably relied on the representation that the financials were accurate.

If we had left in the new provisions, it would be much harder for the buyer to pursue the seller on a fraud basis if the seller had intentionally (or even negligently) misrepresented the financials.

Unfortunately I see issues like frequently. While most escrow instructions state that conflicts between the purchase agreement and the instructions are governed by the purchase agreement language, you may not always have a direct conflict. It's much easier to simply not have conflicting provisions in the escrow instructions in the first place.

I also frequently see escrow drafting promissory notes, personal guarantees and security agreements if they are not drafted along with the APA. These documents frequently have (or lack) important provisions that can substantially change the balance of rights from the buyer to the seller or vice-versa.

On the buyer side, these include rights to notice if there is a missed payment (and time to cure that delinquency) and rights to offset claims against the seller by withholding payments on the note.

As a seller your rights to accelerate the note and the way you address whatever security interest and personal guarantee you have in place can make a major difference in your rights if you ever have to sue to collect. You can also put in provisions which make it much easier for you to sell the note to a third party down the line if you know how to structure it-- such as provisions allowing you to audit the business, run credit checks and get notification of issues with the business down the line.

Before you sign anything from escrow, including instructions, amendments, or additional documents, make sure you know what you're signing and that you aren't giving away any rights the purchase agreement provides or failing to acquire rights that you should have in your promissory note, security agreement and personal guarantee.


I'm a member of my local board of Realtors, so I use California Association of Realtors (CAR) forms, even though there is boiler plate language in the Business Purchase Agreement (BPA) dealing with contingencies and timelines, I have also instructed escrow officers to include language, which protects both buyer/seller. The most important thing is that buyer states that they have done their due diligence and accepts the seller's books and records, and understands that all future profits will be under their own endeavor. I agree it's very important for a buyer and seller to read the escrow instructions very carefully, because in regards to changes, the last thing signed may supersede previous agreements, but that would be something a buyer and seller may want to ask for legal advice about.


  Helpful Resources To Assist In Selling And Buying California Businesses

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.

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.

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.

Ron Hottes, Broker - Serving LA, Orange, Inland Empire Area

LINK Business is a business brokerage team of 28 highly skilled and seasoned professionals. Our business brokers have over 100 years of cumulative experience & the expertise to help you buy or sell a business in the LA County, Orange, Inland Empire areas. Call Ron for a consultation at 310-539-8300.

Chris Seaman, Business Broker - San Diego County Area

Founded in 1994, First Choice Business Brokers has accelerated to become one of the most successful Business Sales Organizations in the world. Our team of agents have gone through extensive training to become experts in the field of business brokerage. Call Chris at 858-578-4111 for more info.

Steve Zimmerman: Restaurant Broker Specialist

Steve founded Restaurant Realty in 1996. He has personally sold/leased over 900 restaurants, bars & clubs, & completed over 3000 valuations. The author of "Restaurant Dealmaker - An Insider's Trade Secrets For Buying a Restaurant, Bar or Club" available on Amazon. Reach Steve direct at 415-945-9701.

Mani Singh, Business Broker, Southern California

I have successfully represented clients sell & acquire multitude of businesses ranging from Gas Stations, Liquor Stores, Markets, Super Markets, Smoke Shops, Postal Stores, Restaurants, General Retail, Auto and Construction related. Phone me for assistance with selling or buying at 951-296-7646 Cell


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Attorney Specialist Shares Escrow Instruction Tips When Buying A Business

Once you have successfully negotiated the Asset Purchase Agreement ("APA") for your acquisition it's natural to relax a little and let your guard down. Attorney Specialist Mark Chatow discusses what business buyers should look out for when opening escrow and getting escrow instruction in place.

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