Escrow Documents For Buying And Selling A Business

During the course of the sale of a business, you will need to find out exactly what documents are needed and when they will be needed. There are a lot of legal processes involved and skipping or failing to carry out one of these areas properly can be disastrous for your future plans. Escrow documents are just one of the types of documents that you will always come across. They are vital when selling or buying a business because they are fundamental for the transaction to legally occur. They also ensure the fulfilment of both the seller and buyer’s right to change his or her mind. As such, escrow documents are a must.

What are Escrow Documents?

Escrow documents are the documents that govern the final payment structure or arrangement for the business to move from the seller to the buyer smoothly. Escrow is an important period of time because it is the last chance both buyer and seller have to formalize their agreement. There are various functions that take place during this time, but all arrangements are specified in the escrow documents.

Escrow documents detail the amount of money that has been placed in the hands of a third party, which is usually a broker or a licensed escrow agent. It also stipulates when the escrowed funds are to be released and to whom, as well as any payment schedule that may exist. It may be that the seller has agreed to pay the buyer in instalments as each part of the transaction has been completed. It may be that so much is held back until 6 or 12 months down the line. This is determined in negotiations and then recorded in the escrow documents.

The main item of importance that is contained within the escrow documents though is the sale terms. The terms of any business sale have to be fulfilled before the escrow can be released, so all of that information has to be recorded in order to ensure that the transaction is a smooth one.

How Are Escrow Documents Used?

An escrow company, broker or lawyer compiles the escrow documents for your specific business sale or acquisition. They are then given to the buyer and the seller, either directly or via the buyer’s broker. Both parties sign the agreement, keep a copy and send a copy back to the escrow company so that everyone is fully aware of the terms and when the funds are to be released.

The escrowed amount is held for a minimum of 12 business days, but the term of escrow will be fully outlined in the documents because both parties have to follow the terms that are highlighted in the agreement itself. As soon as both buyer and seller have carried out the terms, then escrow is closed and the funds are released. The terms differ from sale to sale but can include a stock count, the transfer of contracts, staff training, transfer of property deeds and so on.

As such, escrow documents act as more of a schedule for both parties to ensure that the transaction is smooth. It prevents any problems after the money has changed hands because all of the terms must have been fulfilled. In truth, it protects the seller and the buyer of any business and insures that the process is completed as per their collective wishes. As such, both buyer and seller can be assured that they have both fulfilled their terms and have completed a successful deal.

One Response to “Escrow Documents For Buying And Selling A Business”

  1. Kenneth Says:

    This is not necessary true. Ask your attorney if your state requires you to have an “escrow” or “earnest” account when receiving a deposit down on a business. So do, some do not.

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