FAQs – Escrow

Escrow companies facilitate completion of transactions and ensure that the terms and conditions of the purchase agreements have been met. They are neutral holders of funds and documents during the purchase process. Escrow holders ensure regulatory compliance, prepare routine transaction documents and closing statements, and handle administrative details in an experienced, cost-effective fashion.

Business sale (a.k.a. bulk sale) escrows are designed to protect the interests of both Buyers and Sellers and are used extensively in transactions in many states, including California.

Business (or bulk sale) escrows and residential escrows have key differences: 

• Bulk sale escrows require Notices to Creditors informing the public of the pending sale, which allows claims for certain types of debts to made against the sale proceeds. These notices protect Buyers from creditors attempting to collect on any of the Seller’s outstanding debts. 

• State and county tax agencies examine every bulk sale escrow to collect any Seller’s unpaid taxes. These debts must be paid by escrow or directly by the Seller before the escrow can close. 

• There is no actual recording (at a county assessor’s office) of the change of ownership for any business transactions without real estate. 

• Title insurance is not a part of the escrow process for businesses without real estate. 

• A completely different set of state laws govern bulk sale escrows. 

Bulk sale escrows are required on every California business sale that transfers any furniture, fixtures, and equipment (FF&E) or pays any taxes. 

The escrow company’s tasks will vary with each escrow, but typical duties include: 

1. Publishing and recording the public notice of bulk transfer. 
2. Obtaining UCC and county searches to verify there are no secured liens against the business. 
3. Notifying the required county and state tax and regulatory agencies and obtaining lien clearances from each organization or processing any claims received.
4. Complying with the lender’s requirements, securing loan documents and collecting the lender’s funds. 
5. Collecting purchase funds from the Buyer. 
6. Prorating taxes, interest, rents, security deposits, etc., as instructed. 
7. Preparing routine legal and financial documents such as escrow instructions, notes, security agreements, personal guarantees, basic amendments to agreements, amortization schedules, UCC financing statements, bills of sale, corporate resolutions, etc. 
8. Securing releases of all contingencies or other conditions included in escrow. 
9. Preparing estimated and final closing statements for both parties. A closing statement is an accounting of funds to be deposited or disbursed. 
10. Obtaining signatures from Buyers and Sellers on all documents. 
11. Closing escrow when all escrow requirements of both Buyers and Sellers have been completed.  
12. Notary services. 
13. Disbursing funds upon close of escrow, including payments to third parties (commissions, lien payoffs, etc.).

Buyers and Sellers mutually agree on an escrow holder in the business purchase agreement. In practice, the Buyer selects an escrow company recommended by their Broker, who typically has working relationships with experienced, knowledgeable escrow companies.

The average business escrow closes in 30 to 60 days, but the length of every escrow varies. Regardless of the scheduled closing date, a bulk sale escrow can only close once all the escrow terms and conditions have been completed, and all clearances and releases have been filed with the escrow holder.

Any escrow involving the transfer of a liquor license will take longer to close; they average 60 to 90 days. In addition to the usual clearances and releases, escrow must also receive final approval from the ABC, which they will only deliver when their investigation is complete.

Payment of escrow fees is negotiated in each transaction, but they are typically split 50-50 between the Buyer and Seller.

Closing costs generally fall into two categories:

1. Escrow fees compensate the escrow company that completes the transaction. There will be a bulk transfer escrow fee, which is based on the value of the sale. Escrow fees usually include additional document preparation and processing fees, such as preparing notes and security agreements, loan and lease assumptions, handling franchise documentation, audits, preparing ABC documents, preparing lender payoff documentation, notary services, etc.
2. Third party fees are expenses that escrow holders incur from outside parties when recording, publishing, and running state and county regulatory and tax searches on the business in escrow. Buyers and Sellers are responsible for reimbursing escrow for these fees at close.

Since the tasks required to complete every escrow are different, the fees will vary. Escrow holders will produce an estimated closing statement prior to the close of escrow so that all parties may review the pending charges.

Escrow holders collect a "refundable pad" from each Buyer, which is a small amount of extra funds used to cover unexpected charges.

There are several items such as fees, interest and prorations that may change daily during escrow. And while escrow can estimate the Buyer’s closing costs anytime prior to close, sometimes the amount of these charges changes right up to the closing date. Therefore, escrow collects the refundable pad as a safeguard to prevent a funding shortfall that would prevent escrow from closing. Don't worry, escrow will refund any excess funds after the transaction closes.

The answer is different for opening funds and closing funds.

• Funds to Open Escrow: Escrow holders accept personal checks, cashier’s checks, or wire transfers for opening funds; ACH transfers or cash are not accepted. Opening funds generally have enough time for funds to clear, so escrow holders can accept a wider variety of funding.

• Funds to Close Escrow: Escrow holders require all closing funds to be wired. By law, they will not accept other payment methods such as personal checks, cashier’s check, ACH transfers, electronic checks, or cash. Escrow holders are under tight deadlines to close and have no time to spare for funds to clear.

Every Buyer must call their escrow holder directly and verify the wire transfer instructions prior to sending any funds into escrow.

Online banking fraud is a serious issue and is on the rise. Incidents have occurred where the emailed wire instructions received by a Buyer are not the same wire instructions that the escrow holder sent. Computer hackers have been intercepting unsecured emails and changing the payment instructions to direct funds into offshore accounts. While y our escrow holder will send wire instructions via secured email, personal verification of those instructions is the only safe way to ensure your funds safely make it to escrow.