Share This Info:  

Should A Buyer Be Allowed To Operate A Business Before Escrow Closes?

See All Discussions   •   See All Contributors   •   All New Discussions & Comments

Comments & Replies: 9     Views: 6259     Posted By: Peter Siegel MBA  Peter Siegel MBA: BizBen Founder, ProBuy/ProSell Program Director



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



A business broker who is part of the BizBen Network and is newer in the California business brokerage industry just asked me a question - how I feel about his seller client who was asked by a buyer of the businessto start operating the business before the escrow period had finished.

I told him I didn't think it was a good idea under any circumstances to let a buyer start operating a business during the escrow process.

I would love to hear from other BizBen viewers: brokers, agents, advisors, escrow officers, etc. on what they feel on this topic - any positives to letting a buyer start running a newly purchased business before escrow closes?


Actually we get this question asked a lot during the escrow process. If the parties do agree to do an early possession, I always tell them that the lease and insurance should be in the buyers name and all the consideration should be deposited into escrow plus that I would have them sign an early possession instruction. I had one case where there were no brokers involved and the seller was willing to give possession to the business without having the buyer put in all the consideration into escrow. After buyer took possession, they were making all the excuses why they will not pay for the total consideration amount that was initially agreed upon. It causes a legal problem for both parties. So, yes they can give early possession, please make sure they have a lease and insurance in the buyer's name, total consideration deposited into escrow and sign a mutual instruction covering each other from further liability associated with the early possession. Hope this helps.

Contributor: Due Diligence, Valuations Advisor

About ten years ago I had an accounting client in the Bay Area who entered into an agreement to sell his business. Buyer negotiated a contract to operate the business as general manager while financing was arranged for the purchase. The original 90 day contract was extended a few times as the buyer, seeing all the downside to the purchase, hesitated to close. Eventually the buyer did not perform and found reasons to withdraw his offer. Each sued the other for breach of promise (contract) or something. There were as usual no winners in that scenario. When you buy a business you have a right to complete a due diligence, but you do not have the right to try it out and see if you like the business, get along with the employees, or determine if you are able to maintain customer relationships. Allowing a buyer who has not closed the deal into the business is a serious mistake.


I have never allowed my sellers to let a buyer into the business until escrow closes, except in the case of of early possession on an ABC License. The analogy I like to use is; it's like learning how to swim. If you drop someone in pool the edge is so close its easy to give up when it gets hard, but if you drop them in the ocean 100 yard off shore and point to beach they'll figure it out. Many buyers ask, but it is always a bad idea. If someone is serious about buying a business they'll learn all about running it when they own it.


I never recommend that a Buyer take over a business before escrow closes. Sometimes this has happened because the Seller can't continue to operate but it should be done only as a last resort. Get an operating agreement done, landlord consent and all funds in escrow before doing this. If you serve alcohol get a temporary permit.

Contributor: Business Appraisals, Valuations Advisor

Never! There is always the possibility of buyer's remorse even under ideal circumstances. This remorse usually disappears when a buyer gets to know the business which may take a few months. Letting him be involved in the business before the close of escrow can possibly end a perfectly great sale.

Contributor: Business Broker

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.


NO. All the explanations and exceptions aside, I can't think of any circumstance in which this is a good idea. The only possible exception would be when the business has already "closed in escrow" and there is no option for the buyer to back out. Just be sure that the seller has a damn good attorney on his side.


I agree with many on this forum, and that a buyer should NOT be able to operate the business before the close of escrow. There are many reasons why the buyer should wait till after the close of escrow to operate the business or begin training, one of the primary reasons is a potential clash of leadership in the business, which could end a deal before it's done. I've seen deals either not close or almost not close, simply because the buyer and seller got into a disagreement over something inconsequential. A buyer also without proper training might become overwhelmed and decide not to buy the business.


  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 805-428-2063.

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.

Elizabeth McGovern: Escrow Services - SF Bay Area

McGovern Escrow Services, Inc., is a leading independent escrow company. We are a trusted partner with our clients, assisting them through the tangled bulk sale & liquor license transfer process. We provide attentive, quality & innovative customer service. Phone Elizabeth McGovern at 415-735-3645.

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.

Janet Carrera - Escrow & Bulk Sale Services - 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.

Ranvir S. Sandhu, Esq. - Legal Services For Buyers And Sellers

I've worked at top Bay Area law firms and have extensive experience with business entity formation, mergers, dissolutions, conversions, employment matters, including experience in reviewing and negotiating transactional documents such as leases and purchase agreements.


  Related Articles, Events, Blog Posts, Discussions, Videos, Interviews
How Do I Navigate Through The Negotiation Process When Buying A Business?

Negotiating the terms of a business deal is a delicate process, where one wrong move can cost you the business that you wanted to purchase. Peter Siegel, MBA (BizBen ProBuy Program) discusses the ins and outs of negotiations, and how to work well with the seller to get a deal done.

Sellers Ask: How Long Should I Wait For The Buyer To Do Their Due Diligence?

Business sellers & buyers ask the question in the buying process-how long should I ask for due-diligence when buying a small business? The answer really depends on several factors. They include: type of business, demand for the business, complexity of the business. Advisors weigh in on this topic.

The Bottomline: What Exactly Is Adjusted Net Income, SDC, And Cash Flow?

The use of add backs & adjusted net income is common among sellers of businesses when showing their financial information/performance. But buyers are cautioned to review financials and tax returns / documents closely. Peter Siegel, MBA with BizBen (ProBuy & ProSell, Financing Expert) explains.

4 Reasons Why Business Brokers Do Not Cooperate With Other Brokers & Agents

Despite challenges in the business for sale marketplace, some of the business brokers who make a living by facilitating a deal between buyer and seller are known to stand in the way of a completed transaction because of some outdated ideas. Too bad they put greed ahead of the needs of their clients.

Find Out Why 80% Of California Business Buyers Never Find And Buy A Business

First the dreaded statistic: 80% of all California business buyers looking to buy a small to mid-sized business in California never end up doing so! Peter Siegel, MBA BizBen Founder And Director at 866-270-6278 covers successful tactics all business buyers of small businesses should utilize.

If You Plan To Offer Seller Financing: 3 Things Owner Sellers Need to Know

When selling your business, offering seller financing is a great way to help your business standout from others on the market and it is also a good strategy to consider that can help you close a sale. Peter Siegel, MBA (BizBen ProSel Program & Financing Expert) explains. Reach him at 866-270-6278.

Financing Advice: Showing Add Backs To Get Business Acquisition Financing

When seeking business acquisition financing, it helps to review a seller's addbacks as a source of funding to service the debt service. But explain them correctly. Peter Siegel, MBA business acquisition financing expert and advisor at 866-270-6278 covers this topic on financing a business purchase.

Selling A Business Without Getting Sued: 5 Tips For Business Sellers/Brokers

How do I sell my business without getting sued, isn't a subject just for discussions with lawyers. A seller can take some precautions to reduce potential legal problems. Peter Siegel, MBA Founder Of BizBen and BizBen's ProSell Program discusses this topic for business owners/sellers and brokers.

See All News, Tips And Events

Business Purchase Financing SBA Loans
Chris Lazurik Business Broker
Escrow Services From Helen Yoo New Century Escrow
Tim Cunha Business Brokerage
Facebook
Twitter
Linkedin
Google Plus You Tube
Vlogs and Podcasts


Auto Related
Business Services
Children Related
Communication Related
Computer, Internet Related
Construction Related
Entertainment Related
Financial Services
Health, Beauty Related
Home Improvement Related
Maintenance Related
Manufacturing Related
Media, Publishing Related
Pet Related
Photography/Video Related
Real Estate Services
Restaurant, Food Related
Retail Related
Service Related
Sports Related
Transportation Related
Travel Related
Wholesale Related

Auto Body Shops
Auto Repair Shops
Bakeries
Bars, Sports Bars
Cafe Restaurants
Car Washes
Cleaning Services
Clothing, Apparel Stores
Coffee Shops
Convenience Stores
Deli Restaurants
Discount, Dollar Stores
Dry Cleaners
eCommerce Websites
Fast Food Restaurants
Florists, Flower Shops
Full Service Restaurants
Gas Stations
Gift Shops
Gyms, Fitness Facilities
Home Health Agencies
Hotels/Motels
Ice Cream Shops
Juice, Smoothie Shops
Laundromats
Liquor Stores
Markets, Marts
Nightclubs
Pizza Restaurants
Postal, Shipping Stores
Preschools, Day Care
Print Shops
Salons, Beauty Shops
Sandwich Shops
Smog Test Only Shops
Smoke Shops
Spas, Med Spas
Sushi Restaurants
Tire Shops
Towing Services
Vending Routes
Wireless, Cellular Shops
Yogurt Shops

Alameda
Alpine
Amador
Butte
Calaveras
Colusa
Contra Costa
Del Norte
El Dorado
Fresno
Glenn
Humboldt
Imperial
Inyo
Kern
Kings
Lake
Lassen
Los Angeles
Madera
Marin
Mariposa
Mendocino
Merced
Modoc
Mono
Monterey
Napa
Nevada
Orange
Placer
Plumas
Riverside
Sacramento
San Benito
San Bernardino
San Diego
San Francisco
San Joaquin
San Luis Obis
San Mateo
Santa Barbara
Santa Clara
Santa Cruz
Shasta
Sierra
Siskiyou
Solano
Sonoma
Stanislaus
Sutter
Tehama
Trinity
Tulare
Tuolumne
Ventura
Yolo
Yuba

0 to $99,999
$100,000 to $249,999
$250,000 to $499,999
$500,000 to $999,999
$1 million to $2 million
over $2 million




BizBen - Where California Deals Get Done! 888-212-4747
7172 Regional Street #364 · Dublin, CA. 94568
BizBen · Copyright © 1994 - 2019, All Rights Reserved

               Vlogs and Podcasts  
Join Us On Social Media - Content Updated Daily
Sign Up Today - For Our FREE BizBen Weekly Email Newsletter
Includes The Best Info On Buying, Selling, Valuing, Financing California Businesses:
Articles, Blog Posts, Podcasts, Videos/Vlogs, Discussions, Q&A, Workshops, Webinars,
Resources. Watch For An Email Confirmation After Signing Up Above. Thank you.
Clost Login


Please confirm your registration by clicking the link we've sent to .

If you can't see it, please check your junk mail folder.

If you have any problems registering, or need assistance with your new BizBen User Account please phone BizBen Customer Support at 888-212-4747.



First Name:*
Last Name:*
Email Address:*
Confirm Email:*
Create Password:*
Confirm Password:*
Phone:
(   
 


You Are A:
Individual
 
Intermediary
 

Email Address:
Password:
 
Search BizBen.com

500 New & Refreshed Detailed Postings Daily
Over 2500 Resources Available On BizBen
Since 1994. Where California Deals Get Done!
Should I Buy A Business That is Losing Money? Feedback From Top Advisors...
Read More News
How Do I Navigate Through The Negotiation Process When Buying A Business...
Read More News