The Eight Step Selling
Process - Part II:
The Escrow Process
An escrow is a process
whereby there is a third party in a transaction,
(the first and second parties are the buyer and
seller), usually an escrow company, which is a
neutral entity hired by buyer and seller to hold and
disburse all monies in the transaction as well as to
perform title procedures to assure that the sellers
outstanding creditors will be paid and that the
buyer will receive title free and clear of all liens
and encumbrances. The escrow fees are usually paid
50/50 between buyer and seller and average between
$1,200 to $1,500 depending on the size of the
transaction. As provided by the Uniform Commercial
Code of California, all monies (including
consideration for stock inventory) must pass through
escrow, and no monies can be released prior to close
of escrow.
The escrow process
consists of the items listed below:
1. Escrow
Instructions – Once an offer is accepted, a copy
of the signed offer and the buyer’s deposit is
submitted to the escrow company. Upon receipt the
escrow company sets up an escrow, issues an escrow
number, issues a receipt for the deposit and
generates escrow instructions. Escrow instructions
must be signed by all parties and delivered into
escrow, together with initial deposits, before the
Notice of Bulk Transfer is published or recorded.
The Notice of Bulk Sale is a document which is part
of the escrow instructions authorizing the escrow
company to publish in the newspaper an announcement
regarding the pending sale which gives notice to the
seller’s creditors to file any outstanding claims
they have against the seller into escrow The
creditors have twelve business days to file their
claims against the seller into escrow once the
notice is published. Any subsequent claims are
filed against the seller after this period.
2.
Tax and Lien Clearances – The escrow obtains
clearance certificates from the Employment
Development Department, State Board of Equalization
and Franchise Tax Board thereby eliminating any
seller tax liability spilling over to the buyer.
Any secured liens against the business such as
equipment leases, seller carry back notes, etc.
must be paid off by the seller at the close of
escrow
3. Escrow Closing
Papers – The items listed below are included
with Escrow Closing Papers.
A. The Bill of
Sale – This document includes a list of all
the fixtures and equipment included with the
sale.
B. The
Covenant Not to Compete – This document, if
applicable in the transaction, prohibits the
seller from competing within a certain radius of
the subject business for a given period of time.
C. Closing
Statement – One is prepared for the seller
and one for the buyer and each statement
breakdowns the total accounting of the
transaction and shows the total debits and
credits paid by each party. On the closing
statement the following items are prorated:
unsecured personal property taxes (taxes paid on
the personal property), rent and real estate
taxes, if applicable. The sales tax on the
fixtures and equipment is paid by the buyer and
the buyer usually allocates the purchase price
subject to approval by the seller. The only
portion of the sales price which is subject to
sales tax is the fixtures and equipment.
D. Promissory
Note - If part of the sales price is being
carried back by the seller in the form of a
note, escrow draws a promissory note which is
secured by a security agreement (called a UCC1)
which is recorded with the Secretary of State’s
office and stays as a lien on the buyers
business until the loan is paid off.
E. Inventory
– Saleable inventory includes food, beverages
(alcohol and non-alcoholic), paper supplies and
cleaning supplies. These are paid for by the
buyer usually at the sellers cost and an
inventory is taken at the close of escrow to
determine how much the buyer pays for these
items.
F. Liquor
License Transfer – If there is a liquor
license transfer the escrow company must confirm
that all the money is in escrow before they
notify the Department of Alcoholic Beverage
Control to complete processing the license
transfer. The escrow must be notified that the
liquor license has transferred before the escrow
is closed.
The escrow process is for
the protection of all parties involved in the
transaction and in our opinion a necessity.
