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.

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Introduction:

This article is written as a general discussion on the subject of “Due Diligence”. It is for informational purposes and not intended to be a definitive guideline for your exact situation. You should consult the appropriate professionals with regard to your specific transaction or situation. Further, this article is in no way advocating, suggesting or implying that anyone engages in any type fraudulent activities whatsoever. These are simply the things a buyer should be aware of when doing due diligence in buyer a business.

You spent months finding the right business. The seller says that you cannot go by what the tax return shows but the business is making a lot of money, and he can prove it. Your inspection of the profit and loss statement shows that sales have been increasing slightly in the last few years. Most important, and the best news of all is; the price is right! Does it sound too good to be true? I am sorry to tell you this, it probably is.

I think it was Benjamin Franklin who said, “A fool and his money are soon parted.” Mr. Franklin must have known a lot of business buyers. When buying appliances that break in a month, it costs you a few dollars. When you go to a swap meet and are cheated because the solid gold watch is really gold plated, it costs you a few hundred bucks. When a used car salesman cheats you, by selling you a lemon, where the speedometer has been turned back 100,000 miles, it costs you a few thousand dollars. Getting cheated buying a business can cost you many thousands to hundreds of thousands of dollars. The only investment or purchase that I know of where you can be cheated out of more money is in the area of real estate. Real Estate fraud can runs into the hundreds of millions of dollars and does. You would be shocked at all the people between 1875 and 1950 who saw ads for prime real estate in Florida and bought swamp land.

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The final part of the whole deal is the escrow. The word is an old Anglo-French word which originally meant ‘piece of parchment or fabric’. In today’s parlance, the word describes the process whereby a property is deposited with a third party to be transferred to the grantee (buyer), when certain conditions are met.

There is a lot of paperwork involved in buying and selling a business. It can be a daunting task, just from the paperwork alone. It can also be very stressful. An escrow officer specializes in handling these things and ensures that the buyer gets everything he or she is buying, with no hidden debts on the business and that the seller gets their money.

The things to know about escrow procedures with regard to a business is that it differs from a real estate escrow in the following areas:

a) Date specified in escrow instructions for a business is ‘on or after’ the specified date. In real estate, the term used is ‘on or before’.

b) When the seller is paying all or a part of the escrow fee, a deposit from the seller is required as well as the buyer’s deposit. Usually the costs are split, but it is whatever the parties agree to.

c) If the sale in any way includes a liquor license, then all the money, including what is being paid for the liquor inventory must go through escrow. Also, no funds can be released before the escrow is closed.

d) Finally, Instructions must be written and signed by all parties along with all initial deposits before the notice of sale can be published. When the notice of sale has been published and recorded, there is a 12-day minimum period, which does not include holidays and weekends, in which, any creditors of the seller can file claims with the escrow company. If the business being sold includes the transfer of a liquor license, then the time is extended.

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Buying a business in today’s economic climate requires that you, the buyer, be on the ball, with regard to business basics.  This economic climate, as far as businesses are concerned, is a sellers market.

With the corporate downsizing, economic downturn and other factors, there are a lot of very knowledgeable buyers out there looking for one of the very few good business to buy.  This means that you, as a buyer have a lot of competition.  Consequently, you need to be well prepared. Professional business buyers, report that it takes anywhere from 3 months to 3 years to find the right business.  So, if anything, what can be done to speed this looking process and at the end finally get a good business?

The decision - the first step is deciding to buy a business.  Once you have made this decision and you are definite and firm about the fact that you are definitely buying a business, the process has started.

The second step is to decide what kind of business. This is really really important.  What are the criteria for this business you are looking to buy? Do not make a wish list or what would be nice. Make a list of what is important. For example, if your standard of living requires $100,000 income, do not compromise by looking at businesses that make only $50,000.

That is unless you consider yourself a knowledgeable business manager and marketing person who knows that any business they buy will double in income and sales. That kind of buyer can buy a business that makes no profit and probably should. 

Other criteria include; is it something you can handle? What kind of work are you willing to do? If you like sales and do not like running a factory, buy a distribution company, or sales organizations, and do not buy a manufacturing firm, unless you have a partner that likes running a production line.

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One of the most common ways to enter the world of entrepreneurship is to start your own business.  A less common approach is to purchase an existing business.

The phrases “mergers & acquisitions”, “buying a business” and “business acquisition” are all terms that have become synonymous with big business.  Why? Because those are the deals that get picked up by the media, broadcast on the news, and mentioned in business publications.

But, buying a business is not just for the corporate world.  Business transactions are happening all around us every day.  We just don’t know that they’re happening because they’re not public information.

Buying a business is one of the best ways to become your own boss.  It often times proves more viable than a start-up.  Let’s compare:

Revenue Day One – The most important difference between buying a business and starting a business is revenue on day one.  With a start-up entity, there will be no familiarity with your business, your products, or your services when you open.  You will need to build your own customer base and develop your own brand from scratch.  When purchasing an existing business you are purchasing an existing name, inventory, location, skilled workforce, reputation and most importantly customers (revenue!).  This does not imply that you are purchasing a customer base under contract (although some may be).  Rather, it means that these customers have had an experience working with the business and assuming their experience was positive, they will remain loyal to the business.

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Many of us take for granted that we can just go to our front yard and pick up the newspaper each morning to read it.  Very few people think about the processes and behind the scenes work that gives us our morning papers.  We just gather up the paper and read it at our leisure.  When you buy a newspaper business for sale, you will realize that there is a great deal of work behind the scenes that enables the rest of us to simply go to our front lawn for the daily paper.

Writing and Publishing Staff
In order for a newspaper to be successful, it needs writing and publishing staff.  Before you buy the newspaper company it is important to ascertain that the writing and publishing staff will continue with the company.  It can be extremely challenging to start over with brand new staff and expect the newspaper publishing company to be successful.

Current reporters are aware of what types of events are happening in the community and the world to report on.  Editors are already aware of what draws in readership and which stories need to be killed and which ones to probe further.  When you find a newspaper business for sale, make certain that the writing and publishing staff will be part of the sale so to speak.

Technology Staff
The technology staff is extremely important to any successful newspaper publishing business.

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When you are considering buying a business these days, you have to consider buying into the current demands of society as a whole. Although that is something that any successful entrepreneur will already know, many do not consider the one viable business that could make a lot of cash over the years – construction! We all consider buying property, but very few of us actually buy a construction business. There are construction businesses for sale all over the world, but it is all about finding the right one. Finding the best business when you buy a construction business is never easy, but the factors to consider below will help you.

Profitability
There have been numerous studies conducted that show construction businesses are in demand. There has been a rise in the amount of property development all over the world, especially in the United States. However, the profitability of a construction business for sale may not look good on paper. The potential is there but it is whether or not you can tap into it. A highly successful construction company with a healthy cash flow can earn upwards of $5 million profit every year, whereas the less successful businesses lose money. This may be why the individual owner is selling his business. If that is the case then it would drastically affect the price paid and also the level of risk that you take.

Your Construction Experience
Whilst it is possible to invest in a construction business without having any experience in the industry, it should be avoided because you have to have had hands on experience in the industry in order to make a success of it.

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If you are looking for a business to add to your portfolio that has the potential to become global and reap millions of dollars profit every year then the food manufacturing, production and packing businesses for sale are extremely viable options. There are a number of food manufacturing, production and packing businesses for sale out there today because the market for various different products is huge, thanks largely to the choice that consumers want these days. For example, there are allergy foodstuffs designed for those who display various intolerances, organic foods, fast and convenient foods and then your home cooked foods, amongst others. As a result, the options within the food industry are seemingly endless and can generate a real profit if you take the time to look at how to buy this type of business.

Profitability
Considering profitability first, the level of profitability associated with the food manufacturing, production and packing businesses for sale varies greatly depending on the type of business that it is, the existing contracts it has and the overall size of business. It is possible to make profits in excess of $4 million, but then you may only make just over $100,000. The latter is not to be disregarded though because it is still a substantial return and can be supplemented by new lines of business.

Before getting an accountant and lawyer to take a look at the accounts and business plan respectively, you will more than likely have to sign a Non Disclosure Agreement (NDA) because food manufacturing, production and packing businesses tend to be extremely protective about their methods, ingredients and contacts. However, once that is signed then your team will be able to calculate the profitability should you purchase the business further down the line.

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