Seldom do you see a situation where so many things can go wrong. But it can come up, right when a great sale is moving smoothly through escrow, the buyer decides they want to take over early. Once the fox is in the hen house, as they say, it is too late to close the door.
Why, do you ask, would a seller even consider the buyer's request? Well, I've seen my share of tempting circumstances;
1. The seller or a family member is facing serious health issues.
2. The seller is planning a move out of the area and time is of the essence.
3. The seller is short on operating capital; perhaps loans are coming due or credit card loans are eating up the cash flow.
4. The landlord may be pushing for back rent or wanting a new tenant.
This brings to mind the old Sun Records story where owner Judd Phillips sold the Elvis Presley contract for $10,000 to keep his recording company afloat, choosing instead to retain Johnny Cash and Jerry Lee Lewis. At the time he felt it was the right business decision for him.
After 14 years as a business broker, I can readily name a few potential pitfalls due to an early possession;
1. The buyer takes over prematurely and the once-dedicated employees suddenly lose all prior loyalty and proceed to bombard the buyer with all the operation's short comings based on their expertise.
2. Employees, seemingly en masse, begin to ask for raises they feel are long overdue.
3. Deferred maintenance issues rear their ugly heads in timely support of "Murphy's Law.
4. Buyer's remorse can hit once they experience first hand all the work entailed in the new venture and since escrow hasn't closed, they might elect to walk away.
I once had a restaurant in escrow where the seller agreed to allow the buyer take over with a temporary liquor license. First order of business for the new buyer was to change the name and embark on a major remodel. The buyer spent the balance of his cash on a total and dramatic makeover. After all, he had a partner that was going to fund the balance of the purchase at close of escrow. BUT, after thinking over the whole investment idea, the money partner walked away.
The buyer was unable to come up with the cash and the seller had to cancel the temporary liquor license in order to get him out. Long story short, the too-eager seller ended up closing the restaurant because the remodel did not work with his concept and his customer base had already been impacted during the take-over.
To avoid these pitfalls, get both buyer and seller together early on during the honeymoon phase and have them unequivocally agree to the following;
1. Place the entire purchase price in escrow.
2. Do not allow any changes to the business itself, until escrow is closed.
3. Have the parties agree to a pre-determined period of training where the seller may shadow the buyer. This can occur during escrow with the seller remaining firmly in control of the operation, the staff and the cash.
Be clear as you can with the parties on these points. It's wise to cross the Tís and dot the Iís. Urge them to proceed through the escrow process as intended. In the end, the buyer can transition into ownership seamlessly and the seller will be appropriately compensated and able to move on.