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Can A Business Seller Back Out Of Escrow If They Simply Change Their Mind?

Comments & Replies: 2 Views: 6581 Posted By: Joe Ranieri

Can a seller of a small business back out of an ongoing escrow? Probably, yes, it all depends how far along the escrow is, which will dictate how messy things will get for both owner & buyer. Joe Ranieri (Southern California Business Broker) gives his feedback with others on this BizBen Discussion.

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

Contributor: Joe Ranieri, Business Broker: LA, Orange County Areas

Small businesses for sale transactions are known to have a low escrow closing rate, for a number of reasons, either landlord issues, franchisor qualifications not being met, or state and government agencies getting involved which could kill the deal, and this doesn't even include squabbles among buyer and seller over other issues that may arise. Most often it's the buyer who wants to cancel escrow, because the renegotiation of a new lease is not acceptable or they simply get cold feet and decide they don't want to buy the business. Many businesses are so difficult to sell and find the right buyer, and yet every so often, it's the seller who changes their mind and decides they don't want to sell, because perhaps they were getting a divorce and put the business up for sale but have since reconciled the relationship and want to keep the business, or a health issue has been cleared and they want to retain ownership. This can be maddening for both the broker(s) involved and buyer, and some buyers will ask, "Can they just do that?"

Can a seller back out of an escrow? Probably, yes, it all depends how far along the escrow is, which will dictate how messy things will get. If the lease has been signed by the buyer, then I'd suggest both buyer and seller talk with an attorney. The seller just backing out of the escrow, while all contingencies are being met would be a breach of contract. The only way they could do it legally is if it was specified to the buyer that this particular escrow is contingent upon the seller obtaining another business which is in escrow, etc. Most sellers have obtained a reasonable exit strategy by the time they are deep in escrow and have had their business on the market, but in life, things can and will change.

I use CAR (California Association of Realtor) forms for my transactions, but some brokers use their own forms, so I' d suggest that when a buyer signs contracts, to read them very carefully to make sure that there are no contingencies placed in by the seller. A buyer should also make sure to diligently sign every page. My contracts stipulate that issues between buyer and seller will be mediated before civil action takes place, in hopes that it can be worked out before it gets expensive. The seller may be on the hook for a buyer's legal fees, any inspection fee paid by the buyer during the transaction, and other fees, and so each party should consult with an attorney who specializes in the field of business litigation. The seller may also be sued by the business broker for a commission since they did find a ready and able buyer who was willing to go through with the transaction.

Can a judge force the seller to sell the business to the buyer? Probably not, but again each party should consult with an attorney. Of course, forcing someone to do something would garner a negative response, like objecting to do repairs that had previously been agreed upon by both parties or simply harming the goodwill of the business out of spite.

Contributor: Timothy Cunha JD: Business Broker, SF Bay Area

I advise parties to a transaction that, upon signing the contract of sale, the seller has an "absolute" obligation to sell, subject only to the buyer providing the consideration--the payment--provided in the contract. But, the buyer has only a "contingent" obligation to buy; contingent, for example, on lease transfer, on purchase financing, on satisfactory due diligence. If the seller backs out of the deal through no fault of the buyer, the seller could face "specific performance"--a court ordering the sale, could be liable for damages--the "loss of the bargain", and could be held responsible not only for all the buyer's fees and expenses, but also for the broker's commission. So the answer to "Can a seller back out on a deal?" is simple: Yes; but without fault on the buyer's part, that breach of contract is going to cost the seller dearly.

Helpful Resources To Assist In Selling And Buying California Businesses

Shalonda Chappel-Pilgram: Escrow & Bulk Sale Services - Southern California

Escrow services to brokers/agents, sellers, & buyers. Established 43 years. Extraordinary service. Experienced with handling difficult transactions. One stop for all your escrow needs: Bulk sales, lien searches, UCC searches, liquor license transfers, publishing & recording services. 951-808-3972.

Helen Yoo, New Century Escrow - Escrow Services In 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 & Bulk Sale Services - CA

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.

Willard Michlin, CPA, Certified Fraud Examiner, Due Diligence

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 805-428-2063.

William Park, Business Broker - Southern California

Highest Volume Broker in California, Simply Check our HUNDREDS of Listings! Over 25 Associates, Speaking Dozen Languages, Helping Buyers and Sellers of Small Business since 1982, Centrally Located between Los Angeles and Orange Counties, while Riverside & San Bernardino Counties are Very Accessible.

Brad Steinberg, Business Broker: Laundromat Specialist

PWS is the leading laundromat broker in California. Since 1968 PWS has brokered over 2,500 laundromat sales. With over 90 employees dedicated to the coin laundry industry, PWS has 18 licensed agents, a 3 person in-house finance department, 10 service technicians and a 20 person parts department.

Steve Zimmerman: Restaurant Broker Specialist, California

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.

Janet Carrera: Escrow & Bulk Sale Service - 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.

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