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Top 5 Reasons Why Businesses For Sale Fall Out Of Escrow

50% of all California small business for sale transactions fail to complete. Why do businesses for sale fall out of escrow? Joel Miller (a senior care business specialist) discusses his 5 top reason why businesses fall out escrow along with other brokers, advisors on this BizBen Discussion.


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Contributor: Broker/Consultant: Elderly Care Services
"Fell out of escrow." This is a phrase that any Business Broker simply hates to hear. But unfortunately, as most Escrow Companies report, the percentage of escrow's successfully closing to escrow's being opened is very low. Why is that? Doesn't it seem that if one is to open an escrow you expect it to close?

There are multiple reasons why an escrow may not close but here are some of the top 5 reasons in my opinion;

1. Poor communication Being able to communicate with all givens parties is imperative in the sale of a business. For example, If a Landlord chooses to not answer their phone or emails in a timely fashion, do you think this could generate doubt and frustration with the new potential Owner of the business.

2.Failure of the buyer or business to qualify for financing. Prior to opening escrow make sure your Lender or the financing is 100% in place. Allow your lender to review the business's book and records, tax returns and financials along with the Buyer's financials.

3. Failures of the business or property. Have all the "challenges" or "unique attributes" of the business been disclosed prior to escrow being opened?

4. Bulk Escrow UCC search finds undisclosed or forgotten liens, EDD issues, tax franchise accounts, ...

5. Unrealistic expectations. This is probably one of the biggest reasons an escrow falls apart. How many times have we seen a Buyer simply back out of an escrow after the excitement of buying a business goes away or the realities of what it takes to succeed in a business finally hits them?

When considering a business to purchase give yourself permission to ask all the hard questions. Find out first if the business you are considering is really right for you and if all of your concerns are being addressed. Get all of your financing in order, understand the industry you are interested in. It is a lot easier to say no thank you to the purchase of a business before escrow is opened rather than later.

A fundamental reason for a business transaction to fail during escrow is inadequate preparation by the seller and/or the buyer.

The seller should have everything that could possibly be requested during due diligence prepared and available in advance: accurate books and records, tax returns, bank statements, leases, inventories, supplier and customer contracts, employment and payroll records, etc.

Any "problems" should have been resolved: things such as customer/supplier/employee claims and complaints; pending, actual, or potential lawsuits; unpaid taxes; health, safety, and building violations; and anything else that would cause the buyer to have misgivings about the health of the business.

The buyers should have their own finances in order, including obtaining pre-approval for a conventional or SBA purchase loan, and adequate credit information to support the seller providing them with a "take-back" or seller's loan. The seller should require that the buyer provide evidence of the funds for closing and their credit-worthiness immediately upon submission of their offer.

A successful business closing requires complete transparency, honesty, mutual respect, and trust. Without those elements it will be very difficult to achieve a successful business transfer.

The two main reasons I have experienced escrows going sideways are mainly due to third parties, such as landlords and franchisors. I always want to see some sort of commitment coming from the buyer, which means at least $10,000 to open escrow, if the buyer only wants to open escrow with $2,000-$3,000, then that tells me they could easily walk from the deal for any reason. It helps to have a long and complete due diligence period before opening escrow, so that the buyer is fully secure in the decision they have made.


BizBen Blog Contributer Buying a Business


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