I am selling my business and wondering if I should use an escrow/bulk sale service to complete the deal. What are the advantages, disadvantages (to the seller and buyer) of using an escrow service? What is the cost? How long does it usually take? I know I could save some money not using one, but is it worth it?
An escrow is a neutral party licensed by the state to perform a non biased transfer of a number of financial transactions. As regards to a business transaction they follow all the state requirements for a business transfer and also check for liens, judgments and other potential hindrances against the business.
The bulk sale process is used when assets of a business are being sold (not on a stock sale). The bulk sale protects the buyer and some what the seller from any claims suppliers or creditors would have against these assets. Prior to the sale, a notice is posted in a news paper servicing the area where the business is located stating the business name, date of closing and how and where a creditor my file a claim on the assets.
The escrow process usually starts when a buyer's down payment is deposited into the escrow company’s escrow account. The escrow is closed after all the documentation (purchase agreement, financing arrangements, due diligence, funds transfer and other business specific tasks) are completed. This can be done within a few days to a number of months depending on the time required to create all the documentation.
The Escrow and Bulk Sale processes are very beneficial to both buyer and seller. If done properly California law will protect both buyer and seller from potential serious legal problems. The cost will vary and is usually split between the buyer and seller. Check with your local escrow company for costs.
Since both Escrow and Bulk Sale are complex processes and I only briefly covered the subjects, I would advise you to look into the California Civil Code to get more details on both processes.
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Escrow process is primarily designed to protect the Buyer but since it ensures a smooth transaction it will give Seller the peace of mind that once the deal is done no prior liabilities will come up that can cause issues between you and the Buyer. Any prudent Buyer would insist on going through Escrow.
As a Broker I would never get involved in a deal that doesn’t go through an Escrow and publication of Bulk Sale Notice (if applicable). Escrow performs some very important functions. It is a neutral party that holds the funds. It asks for and receives tax clearances from State Board of Equalization (Sales Tax), EDD (for employment taxes), Franchise Tax Board (State Income Tax). It checks any existing liens on the business/property that need to be cleared. It publishes the Bulk Sale Notice. Although most business sales are an "ASSET SALE" meaning that the corporation will be retained by Buyer and only the business assets are being sold, there are Successor Liabilities that are automatically passed on to the Buyer of a business unless clearances are received or liabilities cleared. Taxes are a good example of that. Also the creditors of the business could come after the buyer for Furniture, Fixtures, Equipment, and Inventory if they are not paid prior to closing.
As you read this you may feel that all this is primarily for the benefit of the Buyer. Since most purchase agreements state that you are giving buyer the business free and clear of all liens and liabilities (except those that Buyer accepts to assume), if someone comes after the buyer then Buyer will come after you. I have always recommended to my Sellers that it is best for them to have peace of mind once the business is sold and they have moved on.
That is why I strongly recommend that you use an Escrow service. The cost of Business Escrow depends on the size of the transaction. It can range from a little under $1,000 and up to $3,000 or $4,000 for very large transactions. Escrow fees are usually split between Buyer and Seller.
The Bulk Sale Law doesn’t necessarily apply to all transaction, but I usually recommend doing it anyway. My recommendation to Sellers is that you disclose everything and have Buyer signoff on the disclosures, let a neutral party hold deposit funds, get clearances for all liens and liabilities, and transfer the business free and clear of all liabilities.
You can then collect the proceeds and move on to a peaceful retirement or alternate pursuits.
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My brokerage is focused exclusively on the sale of Northern California restaurants and bars. So my experience and opinion relates to the sale of restaurants, but I believe my advise can be applied to any small business.
Using an escrow company or someone qualified to do a bulk sale transfer (an attorney) is imperative for the sale of a business for several reasons. A bulk sale transfer is the sale of ASSETS not STOCK. When the Buyer purchases the stock of a company, they are assuming the liabilities of the business which is the main reason businesses go through an escrow company to complete the sale of the assets of the business.
By buying the assets of the company, the buyer is not assuming any of the liabilities of the company being sold. The escrow company is licensed by the State of California to perform the duties necessary to complete a bulk sale transfer. In a bulk sale transfer, the escrow company follows the rules and regulations necessary to get releases from the various agencies such as State Board of Equalization, Employment Development department and Secretary of State for clearances with secured liens and the payment of county taxes. They also follow the rules necessary to protect the Buyer from the responsibility to pay unsecured vendors after the close of escrow by publishing the notice of intent to sell in the newspaper for the required number of days.
If an escrow is not used and the assets are transferred without a release from the State Board of Equalization, the Buyer could be liable for successor liability of the Seller’s sales tax obligations.
A release from the State Board of Equalization is imperative to the Buyer for this protection. Also when an ABC license is involved in the transfer of a restaurant, the escrow company works with the ABC to issue the necessary paperwork for the transfer of the license. I don’t believe you can transfer an ABC license without an escrow in California.
As a Buyer, you want clear title to the assets you are buying. The last thing you want after you pay your money for a business is for the government or anyone else to show up on your doorstep and say, by the way, you owe me for this or that and you have no protection. So most of these protections are for the Buyer but what about the Seller.
As a Seller, you want a clean transaction with the peace of mind that everything was handled correctly and you will have no problems after the sale. The escrow company acts as a neutral agent to collect and disperse funds which is also an important duty.
Escrow companies normally charge a base fee plus a percentage of the purchase price. The custom is to split the escrow fees equally between the Buyer and Seller but like most things in real estate, the responsibility for the payment of these fees is negotiable. And now for the best part…the broker submits their claim through escrow and the escrow can't close until the broker is paid! My best reason to use an escrow!
Profile: Jeff Back At J. Back & Associates - Restaurant Sales: J. Back & Associates Restaurant Real Estate was founded in 1988 as the first bay area real estate company to specialize exclusively in restaurant real estate. I am the past President of Charley Browns restaurants and have been involved in the restaurant business for over 35 years. Phone Jeff at 925-736-8200