The Business Sale begins with the Seller’s acceptance of the Buyer’s offer. The resulting Asset Purchase Agreement is subject to certain “Conditions,” also known as “Contingencies.” These almost always include “Due Diligence,” often include “Leasing” and/or “Financing,” and sometimes include “Franchising,” “Liquor Licensing,” or other conditions. Escrow helps protects everyone, by ensuring that the agreed conditions are met before title and funds are transferred.
The best time for Due Diligence is usually once the offer has been accepted, but before escrow has been opened. Remember that Due Diligence is a two-way street. It gives the Buyer an opportunity to inspect the books, records, and other assets of the Business. At the same time, the Seller has the opportunity to investigate the Buyer’s financials and ability to run the Business. The parties are free to use accountants or other advisors in this process, which should not take more than 1-2 weeks for most small businesses. Afterwards the buyers have three option: (1) open escrow, (2) cancel the agreement and return the Buyer’s deposit, or (3) renegotiate the sale terms.
Once the parties are satisfied with Due Diligence, they should take the sale agreement and deposit to a qualified Escrow Company. Make sure that the Escrow Officer is familiar with business escrows, which are completely different than traditional real estate escrows. The escrow officer will incorporate the sale terms into formal Escrow Instructions, which the parties must sign in order to proceed further.
Next Escrow will publish a “Bulk Sale Transfer Notice” in a local newspaper for 12 days, to give creditors an opportunity to file any claims against the Business and/or its Seller. Publication protects the Buyer from such creditors. Escrow will also seek clearances from tax agencies such as the Franchise Tax Board, State Board of Equalization, and the Employment Development Department. The Seller will need to promptly file final returns and payments to these agencies, in order to avoid delaying the close of escrow, and/or the release of the sale proceeds.
Any remaining Conditions of the Sale Agreement must be satisfied before closing escrow. If the Business leases space, then the Landlord may Assign over the existing lease to the Buyer, or write a New Lease with new provisions, such as a longer term. Any Third Party Financing funds must be deposited into escrow. Some businesses also have franchises, licenses or other agreements that must be transferred before escrow closes. Escrow normally takes 4-6 weeks.
The parties must count the inventory and adjust the sale price accordingly. They also determine the Purchase Price Allocation, because the Buyer usually pays sales tax on the market value of the “Fixtures and Equipment.” Traditionally, the Buyer pays transfer fees, the Seller pays Broker’s Fees and tax liabilities, but the parties split the Escrow Fees. On the Closing Date, Escrow transfers the title and funds, while the Buyer and Seller conduct a final walk-through, transfer possession, and begin training. It is that simple!
Alan Lippincott is a business broker and BestSoCal owner who welcomes calls to (877) 420-6478 and Email Inquiries. His comments should be regarded as general in nature and not taken as advice without a personal consultation and signed agreement.