Signing a purchase agreement does not necessarily transfer a business. Between signing and closing, the parties may need to secure landlord consent, address taxes, release liens, and confirm where the purchase money goes. The business sale escrow process provides a structure for exchanging funds and documents when agreed conditions are satisfied. For California businesses and individuals buying or selling a company, understanding that structure helps identify what must happen before the deal can close.
What escrow does in a business purchase
Escrow is an arrangement in which a neutral third party holds money, documents, or both under written instructions. At closing, the escrow agent releases them as those instructions authorize. Escrow does not replace the purchase agreement, conduct all due diligence, or decide whether the business is worth its price.
The transaction structure matters. In an asset purchase, the buyer acquires specified assets and generally assumes only the liabilities identified in the agreement, but successor-liability doctrines and statutes may impose additional liabilities on the buyer. In an equity purchase, the buyer acquires ownership interests in the entity, which generally retains its assets and obligations. Either structure can use escrow, but the required documents and closing risks differ.
The parties should select an escrow provider suited to the transaction and confirm its authority to provide the proposed services. California licensing requirements and exemptions vary by provider. Legal review of the business acquisition agreement and closing terms should occur before money is deposited, not after a disagreement arises.
Start the business sale escrow process with clear instructions
The purchase agreement establishes the bargain; escrow instructions explain how the escrow agent carries out the closing. Those documents should be consistent about deadlines, required approvals, deposits, and release conditions. An inconsistency can delay closing or create a dispute over whether funds may be released.
Before opening escrow, confirm the following:
- Deposit terms: The amount, payment deadline, and circumstances under which the deposit is refundable or subject to forfeiture.
- Closing conditions: Financing, due diligence approval, third-party consents, and other requirements that must be satisfied or waived.
- Required documents: Bills of sale, assignments, ownership transfer documents, resolutions, and any other agreed deliverables.
- Payment instructions: Who receives funds, which creditors are paid, and what amounts remain in escrow.
- Termination procedures: What happens if closing fails and whose authorization is necessary to release disputed funds.
A deposit is not automatically nonrefundable simply because it is in escrow. The agreement, applicable law, and circumstances matter. If competing demands arise, the escrow agent may be unable to release money without joint instructions or a legal resolution.
Resolve California tax, creditor, and consent issues
Some California asset sales may be subject to California Commercial Code Division 6, the Uniform Commercial Code—Bulk Sales. The scope and definitions are principally in sections 6102 and 6103. The law generally covers qualifying bulk sales by sellers whose principal business is selling inventory from stock, including manufacturing what they sell, or operating a restaurant, subject to California-location requirements and statutory exceptions. When applicable, the rules can require advance notice and procedures addressing creditor claims. Determine applicability early because notice requirements can affect the closing schedule.
Sales and use tax obligations also deserve attention. Under California Revenue and Taxation Code section 6811, a purchaser of a business or stock of goods generally must withhold sufficient of the purchase price to cover the seller’s outstanding taxes, interest, and penalties covered by these successor-liability provisions until the seller produces a receipt showing payment or a certificate stating that no amount is due. If the purchaser fails to withhold as required, section 6812 can make the purchaser personally liable for the amount that should have been withheld, generally up to the purchase price. Coordinate with the California Department of Tax and Fee Administration regarding tax clearance and withholding requirements.
Other practical obstacles may include:
- Secured debt: Obtain payoff amounts and arrangements for releasing liens on purchased assets.
- Lease assignments: Review the lease and secure any required landlord consent.
- Contracts and licenses: Determine whether assignment, change-of-control consent, or a new license is necessary.
- Entity approvals: Confirm the seller and buyer have authorized the transaction through the required internal procedures.
Escrow should not release the full purchase price while a required withholding, consent, or lien release remains unresolved unless the parties have a legally appropriate alternative.
Reconcile the closing statement before releasing funds
The closing statement shows how the money moves. The purchase price may differ from the seller’s net proceeds because of debt payoffs, taxes, escrow charges, prorations, and negotiated adjustments. Both parties should review the statement against the purchase agreement and supporting records.
For example, an asset purchase might include an inventory adjustment based on a closing count. The parties should agree on the counting method, valuation rules, and treatment of unsalable inventory before closing. Similar care is needed for working-capital adjustments, prepaid expenses, and customer deposits.
Verify wire instructions through a trusted telephone number obtained independently of the payment email. A last-minute message changing bank details should trigger verification, not an immediate transfer. Confirm that funds have arrived and required documents are ready before authorizing disbursement.
Separate closing from obligations that continue afterward
Closing does not necessarily end escrow or the parties’ obligations. A negotiated holdback may remain for tax clearance, indemnity claims, or a purchase-price adjustment. Its terms should identify the amount retained, permitted claims, notice requirements, release dates, and dispute procedure.
Keep a complete closing file containing signed agreements, transfer documents, approvals, payment records, and lien-release evidence. Separately track post-closing deadlines, including transition services, account transfers, filings, and any remaining payments. Do not assume the escrow agent will monitor obligations outside its written instructions.
Talk to a California business attorney
A free consultation with Itkin Law can help buyers and sellers identify escrow conditions, transfer requirements, and unresolved closing risks. Schedule a free consultation or call (424) 603-8888.
This article is attorney advertising and provides general information only. It is not legal advice and does not create an attorney–client relationship. The law changes, and this article reflects the law as of its publication date. Every situation is different — contact us to discuss how the law applies to your exact circumstances. See our full disclaimer.
