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.