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Discussions > Can A Business Seller Back Out Of Escrow If They Simply Change Their Mind?
Can A Business Seller Back Out Of Escrow If They Simply Change Their Mind?
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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
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
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.
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 |
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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 805-428-2063. |
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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. |
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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. |
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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. |
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George Lanza, Business Broker, At Plethora Business Sales Plethora Businesses, a division of A Premier In Services, Inc., is a Business Intermediary Consulting Firm headquartered in Orange, California. Plethora specializes in the listing and sale of small and medium sized private businesses. |
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Joe Sandbank, Esq. - Legal Services I have provided legal counsel to business buyers, sellers and brokers for over 17 years. With prior experience as a business broker and SBA loan officer, Joe brings both a practical and legal approach to all aspects of the business acquisition process. |
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Ralph Santos, Business Broker Specialist - Health Care Related Businesses Using my MBA and my perseverance I will make things happen! I provide business brokerage niche services specializing in the hospice and home health care agency industry in the Los Angeles County or Ventura County areas. For either buying or selling assistance please phone or email me today. |
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Ryan Clark, Business Broker, Southern California The Veld Group provides a refreshing approach to Business Brokerage, Mergers & Acquisitions and Business Consulting and Valuations. From Your Street to Wall Street, we cater to Main Street Businesses as well as more complex Strategic Firms and Start-Ups. Phone Ryan at 310-652-8353. |
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