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Top 5 Reasons Why Businesses For Sale Fall Out Of Escrow

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Comments & Replies: 3     Views: 3949     Posted By: Broker/Consultant  

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.

Topics: Deal Structures, Escrow Closing Issues     Tags: buying a business, deal structures, escrow bulk sales, for sale by owner, selling a business


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.


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.


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.


  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.

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.

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.

Chris Seaman, Business Broker - San Diego County Area

Founded in 1994, First Choice Business Brokers has accelerated to become one of the most successful Business Sales Organizations in the world. Our team of agents have gone through extensive training to become experts in the field of business brokerage. Call Chris at 858-578-4111 for more info.

Steve Erlinger: Laundry Broker, Consultant - Southern California

I specialize in the laundry industry broker and consultant in Southern California. I assist buyers navigate the many facets of finding, evaluating, and operating a laundry business. I also help current laundry owners find additional stores, sell, evaluate an existing laundromat.

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.

Steve Zimmerman: Restaurant Broker Specialist

Steve founded Restaurant Realty in 1996. He has personally sold/leased over 900 restaurants, bars & clubs, & completed over 3000 valuations. The author of "Restaurant Dealmaker - An Insider's Trade Secrets For Buying a Restaurant, Bar or Club" available on Amazon. Reach Steve direct at 415-945-9701.


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