Buying A Business: What Should Be Included In Escrow Instructions?

Comments & Replies: 3     Views: 16068     Posted By: Transactional Attorney  

Once you have successfully negotiated the Asset Purchase Agreement ("APA") for your acquisition it's natural to relax a little and let your guard down. Attorney Specialist Mark Chatow discusses what business buyers should look out for when opening escrow and getting escrow instruction in place.

Topics: Buying A Business, Escrow Closing Issues, Selling A Business     Tags: buying a business, deal structures, escrow bulk sales, selling a business


Contributor: Transactional Attorney

Once you have successfully negotiated the Asset Purchase Agreement ("APA") for your acquisition it's natural to relax a little and let your guard down. But it's still important to carefully review every document you receive for signature from the broker or escrow.

One of the most common places I have been finding potential problems in transaction documents lately is the Escrow Instructions. While they seem to be an afterthought for many buyers and sellers, Escrow Instructions are important documents and formalize the agreement between the buyer, seller, broker and escrow. When not properly drafted, escrow instructions can create critical problems.

For example, I represented the buyer in one recent transaction. I had carefully revised the APA to make sure that the seller was making the representations and warranties as to the assets and the business we needed to protect the buyer. In one particular representation the seller represented that the financials fairly and accurately portrayed the business' financial position as of their dates.
But when escrow sent out the Escrow Instructions, they had decided (without asking either party) to include a provision where the buyer acknowledged that they were not relying on the financials in deciding to purchase the business.

If it turned out that the Seller had intentionally misrepresented the financials we'd typically have a claim against them for fraud. But a fraud claim for misrepresenting the financials requires that the buyer reasonably relied on the representation that the financials were accurate.

If we had left in the new provisions, it would be much harder for the buyer to pursue the seller on a fraud basis if the seller had intentionally (or even negligently) misrepresented the financials.

Unfortunately I see issues like frequently. While most escrow instructions state that conflicts between the purchase agreement and the instructions are governed by the purchase agreement language, you may not always have a direct conflict. It's much easier to simply not have conflicting provisions in the escrow instructions in the first place.

I also frequently see escrow drafting promissory notes, personal guarantees and security agreements if they are not drafted along with the APA. These documents frequently have (or lack) important provisions that can substantially change the balance of rights from the buyer to the seller or vice-versa.

On the buyer side, these include rights to notice if there is a missed payment (and time to cure that delinquency) and rights to offset claims against the seller by withholding payments on the note.

As a seller your rights to accelerate the note and the way you address whatever security interest and personal guarantee you have in place can make a major difference in your rights if you ever have to sue to collect. You can also put in provisions which make it much easier for you to sell the note to a third party down the line if you know how to structure it-- such as provisions allowing you to audit the business, run credit checks and get notification of issues with the business down the line.

Before you sign anything from escrow, including instructions, amendments, or additional documents, make sure you know what you're signing and that you aren't giving away any rights the purchase agreement provides or failing to acquire rights that you should have in your promissory note, security agreement and personal guarantee.


I'm a member of my local board of Realtors, so I use California Association of Realtors (CAR) forms, even though there is boiler plate language in the Business Purchase Agreement (BPA) dealing with contingencies and timelines, I have also instructed escrow officers to include language, which protects both buyer/seller. The most important thing is that buyer states that they have done their due diligence and accepts the seller's books and records, and understands that all future profits will be under their own endeavor. I agree it's very important for a buyer and seller to read the escrow instructions very carefully, because in regards to changes, the last thing signed may supersede previous agreements, but that would be something a buyer and seller may want to ask for legal advice about.

Replies To This Comment
 
Contributor: Transactional Attorney  Post ID: 1353
As an attorney, that's the concern I've been running across when I provide legal advice to buyers in a transaction. The APA will state one thing with regard to reps and warranties and the escrow instructions will then add something completely different that wasn't in the original purchase agreement. Those changes in escrow are material changes to the purchase agreement and it can make it difficult for both parties to sort out their obligations if there's ever a dispute.

It's also frustrating to see conflicting reps and warranties in the APA itself, where a seller represents that the financials fairly and accurately represent the financial position of the business, but the buyer is then asked to acknowledge that they are not relying on past financials.

We know, of course, that other than in businesses where the value is primarily in hard assets such as inventory and equipment, buyers are almost always also relying on the financials when purchasing a business. That's not the same as relying on past financials to warrant future performance, but I still see escrow instructions (and even some APA's) that state the buyer is not relying on the financials.

If you are adding provisions to escrow, my recommendation is always to negotiate those provisions ahead of time and put them in an addendum to the asset purchase agreement instead. That will provide much stronger protections on both sides as there won't ever be a dispute as to whether a representation was or wasn't part of the original purchase agreement.


Contributor: Business Broker: Southern California

Mark makes a great point about conflicts between the purchase agreement and the escrow instructions. If you are going to take the time and incur the expense of drafting a well thought out purchase agreement, make sure that that purchase agreement is the prevailing document in the event of conflicting language-not the escrow instructions.

In my experience, some brokers will write offers on a single page and then let the escrow company write up the details. I guess in that case, since there is little more than an overview of the agreement, then the escrow instructions should prevail. But if the parties are using a well drafted CABB purchase agreement that has been reviewed and amended as necessary by an attorney, make sure the prevailing document is the asset purchase agreement.


  Helpful Resources To Assist In Selling And Buying California Businesses
Shalonda Chappel: Escrow & Bulk Sale Services - Southern California

Escrow services to brokers/agents, sellers, & buyers. Established 43 years. Extraordinary service. Experienced with handling difficult transactions. One stop for all your escrow needs: Bulk sales, lien searches, UCC searches, liquor license transfers, publishing & recording services. 951-808-3972.

Helen Yoo, New Century Escrow - Escrow Services In 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.

Diane Boudreau-Tschetter: Escrow & Bulk Sale Services - CA

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.

William F. Ziprick, Attorney: Legal Services For Buyers And Sellers

Through creative problem solving, attention to detail, accessibility, & understanding that unnecessary delay is often a deal killer, I work closely with my clients and other professionals to consistently achieve a high rate of closings. Office: 909-255-8353, Cell: 509-951-7230.

Jack Oh, Business Broker: Southern California

Business broker and real estate services in the Los Angeles and Orange County areas. 10 years experience with great negotiating skills. To sell a business or buy a business in the LA or Orange County Areas phone Jack and his team at 562-787-4989 Cell / Text.

Joe Ranieri, Business Broker: Orange, LA County Areas

Having owned retail/restaurant businesses for over 20 years, my interest turned to selling businesses rather than owning them. I specialize in LA & Orange County restaurants, fast food independents and chains, bars, & liquor stores. Call 714-292-5448 Cell/Text.

Peter Siegel, MBA: Business Purchase Financing Solutions

Niche business purchase financing advisory and loan placement services with SBA and Non-SBA Financing, Retirement Fund Rollover Solutions, Combo Financing Packages. To get professionally pre-qualified or more information on the ProBuy/ProSell Programs: 925-785-3118.

Peter Siegel MBA, BizBen Founder, ProBuy, ProSell, ProIntermediary Programs

Founder Of BizBen.com (since 1994). I am the Lead Advisor for the ProSell, ProBuy, & ProIntermediary Programs. I consult daily with buyers, sellers, and brokers daily about buying and selling California small to mid-sized businesses. Call 925-785-3118.


  Related Articles, Events, Blog Posts, Discussions, Videos, Interviews
Getting An SBA Loan To Buy A Small Business: Dispelling Some Major Myths

When seeking SBA loan financing many potential business buyers have wrong information about the process of securing the best financing to buy a business. Peter Siegel, MBA (at 925-785-3118) a business purchase financing expert delves into the myths and facts regarding SBA loan financing.

Business Purchase Financing: SBA Loans & Non SBA Financing Solution Services

I provide niche business purchase financial advisory and loan placement services with SBA and Non-SBA Financing, Retirement Fund Rollover Solutions, Combo Financing Packages, etc. To get more information about getting Pre-Qualified & more info on the ProBuy/ProSell Programs: 925-785-3118 Direct.

Purchase A Small Business With Limited Or No Cash: Financing Tips For Buyers

Purchasing a business with no money down can be difficult, but not impossible. Financing a business purchase or down payment can often be accomplished with these strategies offered from Peter Siegel, MBA (Business Purchase Financing Expert, ProBuy & ProSell Program Advisor with BizBen) in this post.

Thinking About Selling A Small Business? Know These 8 Factors That Matter

The likelihood of selling a business is often determined by external factors in the marketplace. Here are eight influences on how easy, or difficult it might be when selling a small California business. Peter Siegel at 925-785-3118 (BizBen ProSell Program) explains these factors for owner/sellers.

BizBen Podcast & Webinar: Business Purchase Financing And SBA Loan Options

Ever wonder what is involved in obtaining business purchase financing to buy a business or franchise? Peter Siegel, MBA who has over 25 years advising on all types of financing for business buyers in this BizBen Podcast & Webinar - SBA loans, Non-SBA Financing, Alternative Financing Sources.

Due Diligence Checklist: 10 Key Items To Investigate When Buying Businesses

Buying a California small business involves reviewing due diligence checklists so buyers can learn enough to determine whether to proceed with a deal. Here's a due diligence checklist. Peter Siegel, MBA (BizBen ProBuy Advisor & Business Purchase Financing Expert) at 925-785-3118 shares his views.

Business Purchase Financing Expert Peter Siegel - Tips On Proving Cash Flow

What are the actual "provable" adjusted net earnings (cash flow) of a small to mid-sized business being purchased? Buyers need to look carefully at all financial info for the "real" adjusted net income/cash flow. Peter Siegel, MBA (BizBen ProBuy & ProSell Lead Facilitator) at 925-785-3118 explains.

Attorney Specialist Shares Escrow Instruction Tips When Buying A Business

Once you have successfully negotiated the Asset Purchase Agreement ("APA") for your acquisition it's natural to relax a little and let your guard down. Attorney Specialist Mark Chatow discusses what business buyers should look out for when opening escrow and getting escrow instruction in place.


Bill Ziprick Legal Advise
Escrow Town And Country Southern California
Escrow Services From Helen Yoo New Century Escrow
Escrow Services Diane Boudreau-Tschetter
Facebook
Twitter
Linkedin
Vlogs and Podcasts
Advertise On BizBen
Business For Sale California Stats
New Postings Reports On BizBen Sign Up
Instant Email Alerts On BizBen
BizBen ProBuy Program


BizBen - Where California Deals Get Done! 888-212-4747
7172 Regional Street #364 · Dublin, CA. 94568
BizBen · Copyright © 1994 - 2020, All Rights Reserved



Clost Login


Please confirm your registration by clicking the link we've sent to .

If you can't see it, please check your junk mail folder.

If you have any problems registering, or need assistance with your new BizBen User Account please phone BizBen Customer Support at 888-212-4747.



First Name:*
Last Name:*
Email Address:*
Confirm Email:*
Create Password:*
Confirm Password:*
Phone:
(   
 


You Are A:
Individual
 
Intermediary
 

Email Address:
Password:
 

500 New & Refreshed Detailed Postings Daily
Over 2500 Resources Available On BizBen
Since 1994. Where California Deals Get Done!
Business Purchase Financing: SBA Loans & Non SBA Financing Solution Serv...
Read More News
Purchase A Small Business With Limited Or No Cash: Financing Tips For Bu...
Read More News