Holly founded ExitPromise.com as well as StartupPromise.com and so far has answered more than 3,000 questions asked by business owners about starting, growing and selling a business.
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When a business is about to be sold, the parties to the sale may find it beneficial to establish an escrow agent to handle the transfer of certain assets and cash between the buyer and seller. Many times the parties agree to use the escrow account held by one of the party’s business attorneys. However, in many cases the parties prefer to hire an independent escrow agent to handle the assets and cash that will change hands.
What Does an Escrow Agent Do When a Business is Transferred or Sold?
An escrow agent acts as a third party between the buyer and seller to ensure that all conditions of the sales agreement are met. The escrow agent can hold the buyer’s earnest money deposit or down payment, making it easier for the buyer to reclaim that money if the sale is cancelled.
An escrow agent also performs Uniform Commercial Code (UCC) searches to discover any liens against the business being sold. The agent is also responsible for publishing a Notice to Creditors of Bulk Sale in asset transactions, which allows creditors to file claims for any debts they are owed by the seller.
To protect the seller, the escrow agent often requires the buyer to deposit funds several days in advance of the closing date. This ensures the buyer does in fact have the cash, and the seller receives the amount agreed upon in the contract.
How Does the Escrow Agent Know When to Release the Assets and/or Funds to the Appropriate Party?
The escrow agent will not release assets or funds until both the buyer and seller have fulfilled all of their obligations. This includes the terms outlined in the purchase agreement, due diligence, and the transfer of funds. When the principals have met all the terms and requirements of the deal, the agent will “close” the escrow and distribute all funds to the appropriate parties.
Who Pays for the Services Provided by an Escrow Agent?
Buyers and sellers can negotiate who pays the escrow fees when creating a purchase agreement. Often, escrow fees are split between the buyer and the seller.
How Much Does it Cost to Hire an Escrow Agent?
The amount of the fee depends on the size of the business deal, though there is typically a minimum for very small transactions. Some escrow companies calculate their fees by charging a set base rate per thousand dollars of the final sale price.
There also may be processing fees, wire transfer fees, and legal review fees associated with hiring an escrow agent. When considering an escrow service, verify they are properly licensed and insured and also ask about their agents’ experience and fee structure before entering into any agreements.
What will stop disbursement of funds to the seller?
Hi Chris,
The terms of your escrow agreement defines when a seller is to be paid.
If you have questions about your terms, you should consult with your deal attorney asap!
All the best…
Need an escrow for a business I’m selling.
Hi Scott,
Many of our clients have utilized the escrow services of Escrow.com.
Good luck to you!
An escrow agent was secured in my real estate deal and held the buyer’s 10% good faith down payment. The other 2 sellers and I signed a distribution agreement so as not to hold up the sale. If we all agreed on the % distribution via email and verbally, do we also have to wait for the agent to receive all of the notarized documents in their hands? Are we, the sellers, entitled to the interest earned on this cash sale?
Hi Natosha,
The written terms of the escrow agreement spell out when the escrowed money may be distributed to the sellers.
And whether interest will accrue to the sellers is also spelled out in the escrow agreement. If the agreement is silent on the matter, then no interest will accrue.
All the best…