Utilize the escrow process as it is designed to protect both parties to the escrow.
Buying a business is very different than buying a house for a number of reasons. As a buyer, you do not want any surprises as these surprises can be very costly. An escrow can mitigate most non-operational risks when taking over someone else’s business.
Pay attention to the details.
The purchase agreement is the foundation of the escrow and sets the stage for the escrow instructions. All parties should make sure the details are correct before signing the escrow instructions.
Determine form of ownership.
It is recommended that the buyer be a legal entity such as a limited liability company or corporation. Consult an attorney and/or an accountant for advise on this.
Confirm the right to buy and the right to sell.
Escrow will verify that they are working with the right individuals on both sides and that they are authorized to be buying or selling as the case may be.
Make sure the deal contingencies are very clear.
The contingencies are the buyer’s chances to cancel the escrow without recourse. Careful consideration should be given to what needs to be included in the contingencies.
Be thorough with your due diligence or investigation.
This is a topic in and of itself. The key is to have a plan and be thorough.
Secure a taxpayer ID number.
This will be needed by the escrow officer and is easy to get by phone or online.
Consider all of your financing options.
When money is needed to close the escrow, give thought to the best way to raise this capital. Some buyers prefer to give up equity ownership while others may prefer borrowing the money.
Secure a lease assignment or new lease.
Most purchases involve the assignment of an existing lease; however, there are circumstances where it may be possible to negotiate a new lease.
Remove the contingencies as appropriate.
The seller and the escrow officer will push for the removal of each contingency when possible. Be sure you are satisfied that the contingency has been met and can be removed.
Check the results of the lien search conducted by escrow.
Escrow will determine if there are any liens on the business and confirm that all liens are satisfied during the escrow.
Confirm there has been a Bulk Sale Notice published, if applicable.
Escrow will initiate the publication of the Bulk Sale Notice process, which is used to let vendors and creditors know about the change of ownership so that any outstanding claims can be cleared through the escrow.
Be sure escrow gets tax clearances from the appropriate government agencies.
In California, this would include the employment Development Department for payroll taxes, the California Department of Taxes and Fees Administration for sales tax, and the the Franchise Tax Board for income tax. These agencies have the authority to pursue the purchasing entities if they are unsuccessful in collecting all of their fees from the selling entity.
When all of the conditions of the purchase agreement are satisfied, escrow will be closed. It would be prudent to establish your business plan and other next steps during the escrow period so that you hit the ground running.
