BizBen.com
500 New & Refreshed Posts, Postings Daily
Over 8,000 Postings & 2,500 Resources
Assisting Buyers & Sellers Over 25 Years!

Categories

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



Posted By: Peter Siegel MBA: BizBen Founder, Lead Advisor.   Business buyers, brokers, owner/sellers all ask this question at some point. So I decided to ask some of the top Intermediaries in the California marketplace what they thought of the idea. Most of the ProIntermediaries on BizBen agreed with me on taking early possession before the close of escrow.


Comments & Feedback From Pro Intermediaries & Pro Advisors On BizBen:

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?

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.

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.

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.

After many 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 predetermined 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 T's and dot the I's. 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.

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.

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.

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.

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.

Contributor: Helen Yoo, Escrow Services: Southern CA
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.



Place A Posting To Sell Or Buy A Business, Search All Postings


Sell A Business Fast: Place A For Sale Posting Now To Sell A Small Business - 7 Programs To Select From >
Find A Business To Buy Fast: Place A Wanted To Buy Posting Today - Best Way To Find & Buy A Business >
Search Business For Sale & Wanted To Buy Postings On BizBen - 500 New & Refreshed Postings Daily! >

Other Related Blog Posts, Articles, And Discussions You May Be Interested In

Tips For Business Sellers Business Owners: Do Not Make It Hard To Buy Your Business - Successful Tips

Successful sellers of small businesses need a game plan to sell their California small business for maximum price and for the best terms. Peter Siegel, MBA discusses these seller strategies with BizBen Blog readers based on his experience as the lead Advisor with the ProSell Program on BizBen.com.
8 Questions To Sellers 8 Questions You Most Likely Will Be Asked When Selling Your Small Business

When selling your small business, you'll be bombarded with questions - from the brilliant to the ridiculous. You need to be prepared. Here are some of the key questions you can expect to be asked. Tim Cunha (SF Bay Area Business Broker) reviews many of these possible questions from potential buyers.
Dual Agency Brokers Does Dual Agency Really Work For All? ProIntermediaries Discuss This Topic

Who really represents the buyer? The selling broker or agent through dual agency? Many brokers and agents weigh in on this Discussion on BizBen. Bottomline is all business buyers need to know who really represents them and has their best interest at heart when seeking and negotiating on deals.
3 Car Wash Types To Purchase Buying A Car Wash Business: 3 Successful Types Of Car Washes To Consider

One of the most popular business searches (and eventual business purchase) on BizBen is the self serve and full service car wash. Peter Siegel, MBA (ProBuy & ProSell Programs Director) with BizBen.com reflects on three types of car wash models and what buyers should look for in a car wash purchase.
Keeping A Business Sale Confidential Why Is A Small Business Sale Kept Confidential? Advisors Discuss This Topic

Recently a business owner asked me on the phone, "Why do you keep the sale of a business confidential? How do you keep the sale confidential - any good tips?" Multiple Advisors weigh in on this subject. What would be your answer to this business owner? ProIntermediaries on BizBen discuss this topic.
Appealing To Restaurant Buyers During COVID Tips On Selling A Restaurant: Appealing To Restaurant Buyers During COVID-19

ProIntermediary, Joe Ranieri (Business Broker) shares what buyers are looking for in this unprecedented market. COVID-19 has made curb appeal more important than ever when selling a restaurant. Sellers still have the power to attract buyers in this market with focus of a few key requirements.
Questions To Ask A Business Broker Hiring A Business Broker? Ask These Top Key Questions First, Then Decide

The key to finding the ideal business broker or agent and selling a small business is asking the right questions and getting the right answers back! Peter Siegel, MBA with BizBen & several top business brokers and agents (ProIntermediaries) in California contribute to this topic to assist sellers.
Disclosures Needed For Business Buyers What Do I Need To Disclose To All Prospective Buyers Of My Small Business?

When selling a small business you always run the risk of a lawsuit. They aren't as common as one may think in this litigious world in which we live in, but whenever there is money exchanging hands & attorneys involved the stage is set for a lawsuit. Various ProIntermediaries share their viewpoints.
Business Brokerage Questionable Practices Sellers: Watch For These Business Broker Questionable Practices

Lee Petsas (Southern California Business Broker) shares his concerns regarding some questionable business practices by some California Business Brokers lately. Other Business Brokers and Advisors weigh in as well on this BizBen Blog post with other "dirty tricks" they have observed and heard about.
How To Buy A Dry Cleaners Finding A Dry Cleaner Small Business For Sale That Will Be A High Performer

Before you buy a dry cleaners small business, read these critical tips about this industry. Discover why a dry cleaner needs to be "green" to be profitable. Peter Siegel, MBA (BizBen ProBuy, ProSell Program Advisor) explores this topic and other helpful strategies on buying a dry cleaning store.