This piece is the final part in our series on how to buy a restaurant, where we walk through buying a restaurant from start to finish. Want to know more about finding a restaurant or sending a letter of intent? Read the previous articles in this series: “Finding Real Estate to Purchase” and “Steps to Negotiating the Deal.”
Congratulations! You are about to become a proud restaurant owner. You’ve made it through researching restaurants for sale, negotiations and due diligence. Now, you’re ready to finalize the deal.
You and the seller signed the purchase agreement. What’s left? The next step in buying a restaurant is opening escrow.
What does escrow mean in real estate? What is escrow used for? How does escrow work?
In the final installment of our how to buy a restaurant series, we discuss the ins and outs of the escrow process for a business sale. Read more to learn about escrow and closing the deal on a restaurant.
Wait…What Is Escrow? And What’s an Escrow Account?
Let’s talk about escrow by first defining what it is.
The escrow period happens in the time between the seller’s acceptance of your offer and the moment you take ownership of the restaurant. An escrow account is where your funds are held until the sale is finalized.
Escrow Accounts for the Sale of Businesses & Real Estate
How do escrow accounts work?
When you open escrow, you work with a third party to hold your funds in an escrow account until all conditions of the sale are met. Instead of giving the seller cash or a cashier’s check, an escrow account holds your payment until the sale is reviewed and finalized.
The phrase “in escrow” refers to when a third party temporarily holds your funds. The third party could be an escrow agent, attorney or title company.
Once the conditions of the sale are met, the escrow officer or third party distributes the funds appropriately. Escrow protects both the seller and buyer by ensuring everything is ready to go before transferring funds.
How Does Escrow Protect Me?
Escrow in commercial real estate ensures obligations from both the buyer and seller are met before moving money from one party to the other. Using escrow eliminates potential legal and financial messes from bad or fraudulent transactions.
For sellers, escrow ensures they are paid in full after all sale obligations are met. Escrow agents will check that the buyer has enough capital to complete the purchase. Buyers are protected from fraud, surprise business liens or incomplete transfers of ownership. If a seller didn’t disclose necessary information or enter the agreement in good faith, the buyer has the opportunity to renegotiate or walk away.
How Does Escrow Work?
The escrow process begins with appointing an agent. The buyer and seller must agree on a qualified escrow agent before the sale can close. After that, the third-party agent will follow the directions of the purchase agreement.
Agreements include the purchase price, agreed-upon obligations and the closing date for escrow. Before the escrow period can start, the agent needs the following information from the buyer and seller.
Seller
- Contact Information
- Business Name
- Doing Business As (DBA)
- Home or Forwarding Address
- Tax ID Number
- Employment Development Department Account Number (EDD)
- Sales Tax Permit Number
- Breakdown of Purchase Price
- Seller’s Permit
Buyer
- Contact Information
- Deposit to Escrow
- Address
- Tax ID Number
- Employment Development Department Account Number (EDD)
The agent will find and report any overdue taxes, liens or lawsuits against the restaurant during the escrow period.
How long does escrow take? Typically, escrow remains open for 30 to 60 days. The duration of your escrow period depends on the complexity of the sale and if there are any delays.
What Does the Escrow Process Entail?
The escrow process generally goes as follows:
- You and the seller appoint an escrow agent.
- You or the seller bring a signed agreement to the escrow agent.
- You open escrow by making a deposit. The third-party agent will collect your “earnest money” and hold it in an escrow account.
- The escrow agent determines if the sale is subject to bulk sales laws. These laws are in place to stop business owners from transferring all of their assets to one business or person to evade creditors. The seller provides a list of creditors, and the buyer notifies these creditors that the restaurant’s ownership is changing. Depending on the actions taken during this process, the buyer may avoid or assume the seller’s debts.
- The escrow agent obtains clearances on behalf of the buyer. Tax clearances protect the buyer from being responsible for the seller’s unpaid taxes or interest. Any liens against the restaurant must be paid before escrow is complete.
- Your escrow agent reviews the restaurant’s quarterly tax returns to determine how much money should be held back for taxes. At this point, the State Board of Equalization may delay the process.
- Next, the escrow agent will perform a tax lien and UCC search, looking for creditors who have filed a Uniform Commercial Code-1 (UCC-1) form. A seller’s creditors file this form to notify the agent of their interest in the restaurant and its assets.
- A few days before the escrow period closes, you should schedule a final walkthrough of the property.
- Once you’re ready to close, you will notify the escrow officer in writing.
- The escrow agent will put together final documents and distribute the funds.
- Celebrate. You purchased a restaurant! (Toast over a glass of champagne.)
How Do I Tell the Escrow Officer I’m Ready to Close?
The buyer and seller inform the agent in writing when they are ready to close. The escrow agent, attorney or title company will ask for or help you collect the following items:
- Bill of sale
- Closing statement (breakdown of who is paying what)
- Promissory note (if the sale includes a loan)
- Record of inventory
The agent will distribute the funds held in escrow and provide all final, notarized documents (including the title). And you become the new owner!
How Much Does It Cost to Open Escrow?
Yes, escrow accounts do come with a cost. Whether you work with an escrow agent, attorney or title agency, you will have closing fees specific to escrow or your settlement. Typically, the buyer and seller split escrow account fees 50/50. However, the buyer and seller can decide who pays the fees.
Escrow account fees vary, and they are based on a percentage of the restaurant’s sale price. Fees for commercial real estate transactions are often higher than escrow fees for residential transactions.
Other Things to Know About Escrow
Working with an escrow company isn’t a requirement in every state. Some states are considered attorney closing states, where an attorney is required to assist with the closing process. Other states allow for multiple options to take place, either with an attorney or with an escrow agency, depending on your preference.
Title companies, escrow companies, real estate agents, attorneys and lenders may all perform commercial real estate closings in Missouri. Some options may be more commonplace in certain areas across the state.
Now you know how escrow works. You’ll be ready when you hit this stage of the buying process.
Are you looking for a restaurant for sale? Read the first article in this series, “Finding Real Estate to Purchase.”
Have you found a restaurant to purchase? Hop over to “Steps to Negotiating the Deal” for more information on how to initiate a commercial real estate transaction.
Restaurants for Sale in Branson, MO
There’s no city quite like Branson. With plenty of opportunity for growth, not to mention over 9 million visitors per year, Branson is the perfect place for new restaurants.
We put together a list of the top reasons to add your business to this vibrant area of the Ozarks in “5 Reasons to Bring Your Business to Branson.”
Ready to learn more? Need help finding a restaurant?
Contact Commercial One Brokers for more on the latest restaurants for sale or lease in Branson, MO. Our restaurant real estate specialist, Rich Crowell, will help you find available restaurant properties in the area, whether you’re taking over a restaurant or looking for a new space.
