Process of Escrow in California When Selling Your Business
Getting familiar with the escrow process in California is essential for a business owner looking to retire and sell their business. Whether you are currently in the process of selling your business or you are planning to in the future, understanding how selling a business in escrow is part of the process to successfully exit your business.
In California, the escrow for selling a business is a service provided by a licensed third party that will help simplify the sale of your business by assisting you with service transitions, Federal and State of California tax clearances, ownership transfer, and handling of the money in the transaction with your buyer.
Escrow Process in Selling a Business
Selling a business in California isn’t an easy task. Every detail needs to be right to ensure a smooth and accurate selling process. Keep in mind that a business can be classified as an asset- and as such, you want to be careful when handling it. A business involves leases, property, personnel, goodwill, and more. While it may be tempting to rush through the process to get the sale complete, it’s better to take it slow and use an escrow service provider to assist you.
The escrow service is handled by a licensed and neutral third party and assists the buyer and seller and all the other parties in the transaction, controlling the ownership transfer and handling the transactions.
Selling a business can take a lot of time. Naturally, the buyer wants to analyze and value the business before they are willing to receive ownership, but many times, the transaction involves others such as a third-party finance lender and so they have processes to follow as well. As such, the money and documents that need to change hands might be sitting around for a long time – delaying the close. This is where an escrow service comes in handy.
The escrow process handles the money, collecting deposits and other payments from your buyer, assuring you complete protection. Other items include proofs of ownership, keys, codes, and passwords, as well as working with other parties such as Federal and State government agencies, attorneys, accountants, landlords, and more. After every process is finalized, the escrow service hands everything over to the rightful owner, as agreed in the purchase agreement.
Does that qualify escrow as a record keeper? Yes, it does. Escrow can present their records and clear any doubts if any arguments arise to protect all parties in the transaction.
Time Escrow Takes When Selling a Business
Most people expect a 30-day escrow process but this is very fast. The timeline might vary due to various factors. This includes the agreement between the two parties, Federal and State government agencies, any third-party lender, attorneys, accountants, the escrow service provider, and other parties. However, escrow business transfer transactions that last longer than 60 days might have issues as ‘time kills deals”.
You can call on a Certified Business Broker near you to help you with the valuation. Getting an ideal broker comes in handy by taking off a lot from your shoulder. They will:
- Gather all the necessary documents
- Identify and interview prospective buyers including having them sign a Non-Disclosure Agreement
- Marketing the business for sale and building the necessary documents
- Update potential buyers of the proceedings
- Assist with the close of the sale
- Assist with the transition to make sure all things go as smoothly as possible
After you have finalized everything from your side of selling your business, it is now time to negotiate a price with the buyer. Once you agree on a specific amount, the best thing to do is to open an escrow.
Escrow Process
Create an escrow account
This step is quick and straightforward, especially for small amount transactions. The form to fill out is available on the official escrow website. However, the escrow process in California requires account verifications for any transactions exceeding $3,000.
All you need to do is upload all the necessary account verification documents and wait for a review. This takes 1-2 days before proceeding to the next step.
Buyer initiates payment
Once your account has been approved, your buyer can now deposit the agreed sum into your account.
Close the deal
The 30 to 60 days period involves quite a lot of things before the deal is closed. The escrow holder determines whether all sale conditions have been met during this period. This includes new insurance for new owners, sales disclosure, and reports. The buyer must ascertain that everything promised is provided and in the stated condition. After everything is done, the final documents can now be signed to close the deal.
The deal is only closed after both parties confirm that everything agreed on has been met. The neutral third party (escrow) oversees this. Now you can access the funds from the escrow account.
In addition to holding the money for you, escrow also offers additional services to both parties. For example, the final closing papers are signed at an escrow office where attorneys and the notary are present. This makes it easier and faster for them; final payments can quickly be made there physically.
The agent can also calculate all the final payments and prepare the necessary paperwork. Additionally, they can write the checks and deliver them to the correct holders before closing all the documents and meeting attorney obligations.
Even though all this is the typical process followed during your escrow for a business sale, some variations might exist from one transaction to another. One of the main reasons is that different escrow service providers and agents have different ways of doing things, causing slight differences. However, ensure that you fully understand every transaction detail from start to finish.
Escrow Fees in California
One thing that makes the escrow process in California a great option is that the third party represents neither the buyer nor the seller. They just legally oversee the transaction. However, the service provider doesn’t decide who to charge for the service fee. This will also be included in the business purchase agreement in California and is typically split 50-50 between the buyer and seller.
During the negotiations, both the buyer and the seller usually discuss who will pay the escrow fees and other additional costs related to the transaction and include it in the purchase agreement. They might agree that one of them covers the whole amount or that they split all the costs equally at the end of the process.
California has different counties. However, most counties don’t dictate who will pay the escrow fees. However, some will specify who pays what. Counties where the buyer pays the local county fees, include Alameda, Napa, Mendocino, San Mateo, and Sonoma. Those that require the seller to pay for the county fees include San Benito, Sacramento, Santa Clara, and Yolo.
However, there are times when the deal collapses before the final payments are made. The transaction might be canceled, but the escrow agent still provided the services, which means they have to be paid. If the transaction collapses due to the acquisition of funds, then the buyer is the one to pay for escrow fees and any additional costs incurred during the transaction.
The final fees are dictated by several factors, most of which are independent of each other. This includes the selling price, the type of business being sold, the nature of the transactions, and the nature of services provided. Below are some expenses that contribute to the final fee.
- The escrow service fee
- Document preparation fees
- Publication and processing fees
- Lien search and processing fee
- Sales tax. This is payable to the State Board of Equalization. The rate varies from city to city.
- Franchise transfer fees. This is paid when selling a business with a Franchise
- Security deposit and rent to the landlord
In summary
The process of selling your business through escrow in California doesn’t have to be tedious and complicated. When you get your cards right, it might even take a shorter than expected period. It would be best to do this straight from the beginning to the end of the transaction process.
If you need an escrow company for business transactions, a qualified individual at a business brokerage firm like Rogerson Business Services can assist you in the valuation of your business process. This will ensure that you get the maximum possible value for your business.
Selling a business in California is hard. Let Andrew Rogerson, an expert business broker, help you with valuing and selling your business today.
It is currently the perfect storm to value and sell your business in California. With the great resignation that started during COVID-19 and the trend to continue till 2023, there are no shortages of experienced and well-financed buyers looking for their next opportunity.
With a certified business intermediary at your side, we feel confident that you will determine the business’s worth and sell your business in California successfully at the highest price.
See next article: Part of business owners tips to answer how to get started on valuing and selling your business series ->
