Escrowing Funds

The advisability of escrowing funds from the purchase price payments, to cover the buyer’s potential obligations as a successor in business, for example until a tax clearance certificate is issued, is discussed elsewhere. In addition, the seller’s convenience may be best served by having the buyer make note payments to a mutually acceptable escrow agent, for example when the seller wants to take off on an extended post-closing vacation to celebrate the sale of the business and does not want to be bothered by having to keep records about and otherwise monitor the buyer’s extended monthly or other periodic payments. The buyer’s convenience may also be well served by being able to make the payments to an escrow agent whose address may not change as frequently as the seller. An escrow arrangement is also useful in closing a sale where the exact purchase price is not known until sometime after closing, such as when inventory will be counted and priced following closing.

Generally, upon closing the sale of the business, the escrow agent will receive a copy of the purchase agreement, the actual promissory note, the security agreement, the financing statement (which the seller should have taken steps to file before setting up the escrow account) and instructions from the parties. Over the term of the note’s installment payments, the escrow agent’s primary role is to receive the buyer’s payments and forward them (by check or bank deposit) to the seller (after adjusting for fees) and to notify the buyer when an installment payment has not been made timely. If the buyer fails to correct any late payments, the seller, not the escrow company, must enforce the note and proceed against the collateral under the security agreement’s provisions, using the escrow company’s records as an impartial third party as evidence of the buyer’s default. When the note is paid in full, the escrow company will normally deliver all documents to the buyer with the note having been marked as being “paid in full.”