Understanding Escrow in Business Sales

What Is Escrow?

In a business sale, escrow is a neutral third-party process that holds funds and documents until all conditions of the sale are met. The escrow agent (typically an escrow company, title company, or attorney) acts as an impartial intermediary between buyer and seller.

Escrow protects both parties:

• The buyer knows their money won't be released until all conditions are satisfied
• The seller knows the buyer's funds are real and committed

Using escrow is standard practice for business sales and is often required by lenders.

The Escrow Process Step by Step

1. Opening escrow: After the purchase agreement is signed, the buyer deposits their earnest money into the escrow account
2. Escrow instructions: Both parties provide written instructions specifying the conditions that must be met before closing
3. Due diligence period: While in escrow, the buyer completes due diligence. Additional deposits may be made as milestones are reached
4. Document collection: The escrow agent collects all required documents — bill of sale, promissory notes, UCC filings, lease assignments, etc.
5. Lien and bulk sale searches: The escrow agent verifies there are no outstanding liens against the business assets
6. Funding: The buyer's financing is deposited into escrow (bank loan proceeds, cash)
7. Closing: Once all conditions are met, the escrow agent distributes funds to the seller, records necessary documents, and releases keys/assets to the buyer
8. Post-closing: The escrow agent may hold a portion of funds (holdback) for a specified period to cover any post-closing adjustments

Escrow Costs and Timeline

Typical escrow costs:

• Escrow fees: $1,000-$5,000 depending on the transaction size
• Document preparation: $500-$2,000
• UCC and lien searches: $200-$500
• Recording fees: $100-$300

Fees are typically split evenly between buyer and seller, though this is negotiable.

Timeline: Escrow for a business sale typically lasts 30-90 days, coinciding with the due diligence period. Simple transactions can close in 30 days; complex deals with SBA financing typically take 60-90 days.

Escrow Holdbacks and Adjustments

An escrow holdback is a portion of the purchase price retained in escrow after closing to protect the buyer against:

• Undisclosed liabilities that surface after closing
• Customer contracts that don't transfer as represented
• Inventory shortages discovered after closing
• Working capital adjustments
• Accounts receivable that prove uncollectible

Typical holdback: 5-15% of the purchase price held for 6-18 months. The holdback amount and release conditions should be clearly specified in the purchase agreement.

At the end of the holdback period, the escrow agent releases the remaining funds to the seller, minus any amounts claimed by the buyer for documented issues.

Disclaimer and Next Steps

This guide is for informational purposes only and does not constitute legal advice. Business transactions involve significant legal complexity. Always work with a qualified business attorney who can review your specific situation and protect your interests.

Browse businesses for sale on BuyThe.Biz, or find a business broker in our directory who can connect you with trusted legal professionals.