Should we use a business sale escrow? What does an escrow holder do?

A client recently asked me these questions, and I thought the answers would make a good blog post …

A business sale/purchase escrow holder protects the interests of buyers and sellers of small businesses by acting as a neutral independent fiduciary, communications link and closing facilitator. Escrows are used extensively by business transaction attorneys and intermediaries throughout California since regulatory compliance, routine closing documents and administrative details are handled in an efficient, cost-effective manner.  Business escrows are used in both asset and stock sale/purchase transactions.

These are the typical duties of an escrow holder in an asset transaction:

  1. Preparing escrow instructions reflecting the terms of the purchase agreement and describing the duties of the escrow holder
  2. Obtaining and holding purchase funds from the buyer
  3. Complying with Bulk Sale statutes (public notice to creditors), when applicable
  4. Obtaining UCC lien searches for state and county
  5. Notifying the county tax collector
  6. Requesting a beneficiary’s statement if debt or financial obligations are to be taken over by the Buyer
  7. Requesting pay off demands from existing lien holders, receiving claims
  8. Notifying and obtaining clearances from county, state and federal agencies as required
  9. Routine consultation regarding questions and problems that arise
  10. Complying with lender requirements, securing loan documents, signing and receiving funds
  11. Prorating expenses and income (taxes, interest, rents, security deposits, etc.), as instructed
  12. Preparing/filing fictitious business name statements
  13. Preparing routine transaction documents and amendments
  14. Preparing estimated closing statements prior to close of escrow
  15. Securing releases of all contingencies and conditions imposed on the particular escrow
  16. Obtaining appropriate signatures on all documents
  17. Preparing final closing statements for the parties, accounting for the disposition of all funds deposited in escrow
  18. Closing escrow when all instructions of the buyer and seller have been carried out
  19. Disbursing funds as authorized by instructions
  20. Recording UCC-1, UCC-3 and deeds of trust, as needed
  21. Securing tax clearances
  22. Distributing final transaction documents to all parties

This list is generic. Escrow duties in an actual business asset sale / acquisition in California depend on circumstances and are spelled out in instructions prepared by the escrow holder. The duties performed in stock transfers are quite different.

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Al Statz is President of Exit Strategies Group, Inc., a business brokerage, mergers, acquisitions and valuation firm serving closely-held businesses in California. He can be reached at 707-781-8580. EXIT STRATEGIES GROUP DOES NOT PROVIDE ESCROW SERVICES.