Escrow is now closed
“Escrow is now closed.”
Just prior to noon on New Year’s Eve of 2013 I received a call from an escrow officer I had been working with for about a month to help close a transaction. She called to say “Escrow is now closed.” Her phone call brought a conclusion to the most complicated and longest transaction I had handled as a business broker. There were many intriguing and complicated moments, so here is a look at a few of them.
In late January 2012, I was introduced to a buyer that had an interest to buy a business I had for sale. The buyer had experience in parts of this industry which was great and also a highly developed skill set at the company he worked for in identifying smaller businesses, buying them out and merging their operations.
The business I was brokering had started over 70 years ago and was a privately held company. At the passing of the original owner, he chose to pass 50% of his shares to one child and 50% to the other. When each child passed they in turn split their shares and so to sell the business today we had a total of 8 shareholders.
The assets being sold included the business and the real estate the business had operated from for many years. In addition, the corporation owned some other real estate it had acquired over the years and was receiving investment income from tenants of the property.
Selling a business is complicated. Buying a business is complicated. Here are some of the complications we had to work through over an 11 month period.
For the buyer to successfully buy the business, we had to put together an SBA loan for the business and the real estate. For the buyer to buy the business, we had to approach 8 SBA lenders. Each SBA lender had their own loan criteria with many lenders unwilling to lend at the moment because of the industry the business was in. It took approximately 4 months to find a lender willing to lend and their interest was to lend against the real estate and not the business. This therefore meant the sellers had to carry a seller’s note which they were willing to do.
Because the transaction included the business and real estate, the SBA lender required an appraisal on the real estate and an appraisal on the business. The SBA now has very strict rules in place when using real estate appraisers. The process does not allow the SBA lender to choose the real estate appraiser and once both appraisals are complete, they go out to a third party to review and decide whether the appraisals meet the necessary standards.
As part of the buyer’s down payment to buy the business, he was using money he currently had invested in a 401k plan. The process to move 401k funds from the current plan administrator to the buyer is a complex and difficult process that can only be managed by a specialist. This process takes time and requires specific steps to be executed in a specific order so taxable events are not triggered and all steps are documented to meet SBA and third party lender requirements. It is also not a quick process.
Another complication in the transaction was the sellers trying to remove the investment properties from the corporation being sold. There were large tax implications to the sellers and unfortunately it came with conflicting advice. Initially one CPA said there were no tax concerns and so the sellers moved forward. However, it turned out this tax advice was incorrect but there now was no time to fix the problem.
There were many times this deal was about to collapse. The most critical came when it was time for the 8 shareholders to each sign the Purchase Agreement and related documents. It is completely normal in a transaction for the sellers to think they are selling price is too low and conversely for the buyer to think they are paying too much. What turns out to be incredibly difficult is that to sell this business all 8 shareholders had to agree to the sale or it would not happen. There are different reasons all 8 shareholders had to agree but the SBA lender would only approve the loan as long as the buyer was able to buy 100% of the shares of the seller’s corporation. The day all 8 shareholders were supposed to sign the Purchase Agreement and related documents one shareholder refused to sign. The reasons were very personal but it meant the deal could not close. Fortunately the attorney representing the sellers had great people skills and was able to resolve the standoff and get all 8 shareholders to agree to the sale.
This transaction almost had the most costly mistake I’ve seen. Because the buyer was using his 401k money as part of the down payment to purchase the business, the law requires a separate corporation to be created and initially hold these funds. The SBA lender that was approving the loan had thought the real estate that the buyer was acquiring would be moved from the current corporation to the new corporation. This was not the case and the mistake was only discovered the day before escrow was to close. If the mistake had not been discovered it would have triggered a taxable event for the buyer that would have cost approximately $405,000.
The final drama came when trying to close escrow and the fiscal cliff. The sellers were motivated to close by December 31, 2012 as this is the expiring date of the Bush tax cuts and the introduction of higher taxes in California. Everything was set to close on Thursday December 27 but an issue needed to be resolved. It was then all ready to close on December 28 but the issue of the incorrect titling of the real estate was found and it initially meant there was no time to replace the documents at the County Recorder’s office. However, the escrow company agreed to have one of their employees drive an hour to the County Recorder’s office and provide updated documents that then allowed the deal to close.
This was an intriguing transaction for so many reasons. The length of time it took to close was extraordinarily long at just on 11 months. The complications were enormous because there were so many parties involved. These included the buyer, the seller which was a party of 8 shareholders, attorney’s and CPA’s for both the buyer and seller, an SBA lender, a business appraiser, a real estate appraiser, a plan administrator for the buyer’s 401k money, the escrow company, the title company and of course, yours truly as the broker.
Selling a business is complicated. Buying a business is complicated. It only happens when there is a willing buyer and a willing seller and the i’s are dotted and the t’s are crossed.
Are you thinking about selling your business? Would you like to know the value of your business? If you would like more information please visit my website Business valuation.
For more immediate help you are welcome to send an email to Andrew Rogerson or give me a call on 916 570-2674.