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

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Comments & Replies: 9     Views: 6454     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
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.

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.

Brad Steinberg, Broker - Laundromat Specialists

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.

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.

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.

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.

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.


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