Business escrow
BUSINESS ESCROW
Escrow Definition
An escrow is:
1. A contractual arrangement in which a third party receives and disburses money or documents for the primary transacting parties, with the disbursement dependent on conditions agreed to by the transacting parties
2. An account established by a broker for holding funds on behalf of the broker's principal or some other person until the consummation or termination
3. A transaction
4. A trust account held in the borrower's name to pay obligations such as property taxes and insurance premiums.
An escrow account is a place where a third party holds money until all the details of a transaction are complete. An escrow account protects the seller from getting cheated out of full compensation for a business because the money is not transferred until all conditions of the sale are met. The buyer receives similar protection from fraud or an incomplete transfer of ownership.
The Escrow Process
The first part of selling your business involves finding out the value of your business and settling on a minimum price you will accept. Whether you use a broker or agent, or sell the business yourself, you need to advertise and find potential buyers. Make all your books available to prospective buyers, including tax returns, balance sheets, inventory lists and profit and loss statements. Negotiate a price and conditions of the sale. Once you reach an agreement on the terms, you may sign contracts and receive the payment. At that time, you should open an escrow account for about 30 days to make sure all the terms of the contract are fulfilled. At the closing of the sale, final documents are signed and the funds in escrow can be released. The cost of an escrow account for selling a business usually is about $1,000 or less, according to Acquisitions Direct. The cost of opening and using an escrow agent can be negotiated in the final selling agreement. The fees to open and maintain an escrow account typically are split between the buyer and the seller.
An escrow account is a legal tool you can employ to make sure the sale is on the up-and-up. The transfer of intellectual property, such as a domain name or client list, is less tangible and more at risk of default on the final agreement.
In addition to holding your money in a secured bank account, an escrow service often provides additional services. The final closing papers often take place in an escrow office where a notary public and attorneys are available. Final payments are easier to make immediately when you're physically in the office. An escrow agent can ensure clear title of properties being sold, prepare the closing paperwork and calculate all the payments. The escrow agent then writes checks and delivers them to the rightful parties. Coordinating the meeting and all final titles, payments, attorney obligations and closing documents can fall to the escrow agent.
Business escrow - Real Estate
In a real estate transaction, an escrow account is a holding account for money transactions that take place during the buying and selling of a property. A third party is responsible for the escrow account during a buy and sale transaction. Once the mortgage is established, an escrow account holds the taxes and insurance money collected by the mortgage company from the borrower in order to pay the taxes and insurance on the property. The main law that governs escrow accounts is the Real Estate Settlement Procedures Act of 1974 (RESPA). The Initial Escrow Statement also lists any cushion amount required to be held in the escrow account and must be received by the borrower within 45 days of the closing date.
References
Linda Ray, "The Escrow Process When Selling Your Business", http://smallbusiness.chron.com/escrow-process-selling-business-13387.html
