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Escrow, Bulk Sale Closing Fees And Costs - What Do They Include?



A couple newer business brokers asked me during a consulting session recently what I thought the escrow process costs and if there is a large variation amongst escrow or closing companies when it comes to closing fees in California?

Here was my response back to these brokers:

There is no such thing as a typical cost of an escrow on a business sale.

The buyer and seller will pay a total of a few hundred, or thousands of dollars to the escrow company that handles closing of the transaction. There are a number of factors that contribute to the cost of the escrow. The basic fee charged by the escrow company for preparing the paperwork, conducting a session at which all documents are signed, distributing copies of relevant documents to the right parties, calculating the amount of payments and processing the payments to creditors, government agencies (for filing fees and registration costs), brokers and others who have a stake in the transaction.

A rule of thumb is to expect that the basic fee will be calculated on the basis of the selling price, and often is between seven and nine tenths of a percent of the selling price. In practical application, that would mean a base fee of between $700 to $900 involving a $100,000 business transfer.

There may be extra costs for services rendered by the escrow company, in an amount of $200.00 to $750.00 depending on the number of hours needed to prepare all documents and notify interested parties of their financial rights and obligations in connection with the deal.

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I would like to see comments on your experiences with fees and costs of escrow companies on the close of a business sale transaction. Share with BizBen Members and Users about your experiences with comments and replies above.

Thanks.

Contributor: Transactional Attorney
I often have buyers and sellers ask me if escrow is really needed, and I can't emphasize enough how valuable (and cost-effective) a good escrow agent can be in a small business sale.

Especially given that most transactions split escrow costs, your escrow costs will include many items that would cost much more if you had your attorney handle them. My advice is to let escrow handle what they focus on as Tim and Peter have outlined.

The one item that your legal counsel should focus on with regard to escrow is to review the escrow instructions independently. Escrow agents may have counsel on staff, but are not typically attorneys themselves. I've seen multiple times where escrow added clauses or provisions that would have a material impact on a contract, but buyers and sellers often think they are just signing boilerplate language.

I often have buyers and sellers ask me if escrow is really needed, and I can't emphasize enough how valuable (and cost-effective) a good escrow agent can be in a small business sale.

Especially given that most transactions split escrow costs, your escrow costs will include many items that would cost much more if you had your attorney handle them. My advice is to let escrow handle what they focus on as Tim and Peter have outlined.

The one item that your legal counsel should focus on with regard to escrow is to review the escrow instructions independently. Escrow agents may have counsel on staff, but are not typically attorneys themselves. I've seen multiple times where escrow added clauses or provisions that would have a material impact on a contract, but buyers and sellers often think they are just signing boilerplate language.
A mention should be made of some of the more important things the escrow agent does to protect the buyer:

1. Check that all sales taxes have been paid and clearance received from the Board of Equalization
2. Check that all employment taxes have been paid and clearance received from the State of California
3. Check that there are no UCC-1 security agreements (liens) filed against any tangible assets being purchased.
4. Prepare, record, and publish the Bulk Sales Transfer notice to protect the buyer against business creditors.
5. Collect the sales tax from the buyer on the fair market value of the FF&E being purchased.
6. Prepare a proper Bill of Sale.
7. Assure the smooth transfer of the lease on any premises.
8. Hold the buyer's funds in escrow until all the seller's obligations are completed, including the delivery of a signed Bill of Sale.

A mention should be made of some of the more important things the escrow agent does to protect the buyer:

1. Check that all sales taxes have been paid and clearance received from the Board of Equalization
2. Check that all employment taxes have been paid and clearance received from the State of California
3. Check that there are no UCC-1 security agreements (liens) filed against any tangible assets being purchased.
4. Prepare, record, and publish the Bulk Sales Transfer notice to protect the buyer against business creditors.
5. Collect the sales tax from the buyer on the fair market value of the FF&E being purchased.
6. Prepare a proper Bill of Sale.
7. Assure the smooth transfer of the lease on any premises.
8. Hold the buyer's funds in escrow until all the seller's obligations are completed, including the delivery of a signed Bill of Sale.
Contributor: Business Broker, Northern California
The services of a good escrow company can make or break a deal. The escrow company that does business acquisitions is totally different to the escrow company that does residential sales or commercial real estate transactions. I'm based here in Sacramento and I only know of 3 companies that do escrow for business acquisitions. There are many escrow companies that do residential transactions. If the sale of a business includes both a business and real estate that is a more complicated escrow because there are title searches, title insurance and other costs that are specific to real estate. If its a business and the transaction includes inventory then the bulk sale law applies. If its a service business the bulk sale law doesn't apply. If you are buying a business in CA remember you may have to pay sales tax on the value of the Fixtures, Furniture and Equipment with your escrow company able to give you that amount.

The services of a good escrow company can make or break a deal. The escrow company that does business acquisitions is totally different to the escrow company that does residential sales or commercial real estate transactions. I'm based here in Sacramento and I only know of 3 companies that do escrow for business acquisitions. There are many escrow companies that do residential transactions. If the sale of a business includes both a business and real estate that is a more complicated escrow because there are title searches, title insurance and other costs that are specific to real estate. If its a business and the transaction includes inventory then the bulk sale law applies. If its a service business the bulk sale law doesn't apply. If you are buying a business in CA remember you may have to pay sales tax on the value of the Fixtures, Furniture and Equipment with your escrow company able to give you that amount.
The right escrow agent can make all the difference in the world to a successful transaction. Generally, the buyer will technically designate the escrow agent; however, the business broker (generally representing the seller) is the best resource for knowing which one to use. Our standard purchase agreement includes a section designating the escrow agent; but, the buyer has every right to ask the broker why a particular escrow agent is specified. The factors that count are experience, attention to detail, consistency, and, most importantly, calm professional demeanor in the face of the inevitable "closing from hell" where one party (or both) is totally unreasonable.

The right escrow agent can make all the difference in the world to a successful transaction. Generally, the buyer will technically designate the escrow agent; however, the business broker (generally representing the seller) is the best resource for knowing which one to use. Our standard purchase agreement includes a section designating the escrow agent; but, the buyer has every right to ask the broker why a particular escrow agent is specified. The factors that count are experience, attention to detail, consistency, and, most importantly, calm professional demeanor in the face of the inevitable "closing from hell" where one party (or both) is totally unreasonable.

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