Business Escrow Process and Potential Post-Transaction Issues

March 9, 2020

During a big purchase or the sale of your business, you may wonder how to ensure trust between you and the other person in the transaction. Typically, this is when your broker, real estate agent, or business partner introduces you to an escrow agent. But what does an escrow agent actually do and why would you want to utilize one? And how do you protect yourself post transaction, with or without the help of an escrow?  

Escrow Agent

An escrow agent is the third party to a transaction. Their only goal is to ensure that all conditions of the sale are met. They do this by holding money, deposits, down payments, deeds, bills of sale, and other important documentation until the other party has fulfilled their duties. 

For example, an escrow agent for a home sale will deposit the buyer’s funds and hold onto the money until the transaction closes or the transaction has been cancelled. This does two things:

  1. It gives confidence to the seller because they know there is actual money behind the buyer’s intent.
  2. it prevents the buyer from potentially sending a check the day of and then instructing the bank not to pay once the signatures have been secured. 

The typical pre-sale issues are:

  1. Problems with buyer’s ability to procure funds;
  2. pre-sale due-diligence finds issues that make the deal untenable; and
  3. final contract terms cannot be agreed upon.

Having an escrow agent can resolve these issues by holding the funds and documents until these issues have been resolved or the deal has been called off and each party has their respective property returned to them.

Escrow Fee

The escrow fees are typically split between the two parties, which makes sense because each party will typically have a set of instructions for the escrow agent. Those instructions can be as simple as “release X amount of funds when both sides have signed the sales agreement,” or the parties can enter into an extensive escrow agreement. Escrow agreements lay out the powers of the escrow agent, dictate the specific times and events that will cause distribution of documents and monies, and outline the representations and responsibilities of the seller and buyer during the transaction. The last reason, the outlining of the representations and responsibilities of the parties, may be enough to warrant entering into such an agreement because now there is another document defining what expectations must be met by each party.

What if you are selling both the business and the property it is located in? You don’t need two separate escrow and sale agreements, but it may make sense to have separate escrow agents since one would be familiar with the requirements for a sale of a business and the other would be familiar with the requirements of the purchase and sale of land. 

Potential Post-Transaction Issues 

Though escrow plays a significant role up until closing, there is an equally significant set of issues post-closing that may result in certain miscues and problems without proper guidance. Typical post-transaction issues include violations of representations and warranties made regarding the sales agreement, significant drops in value of the purchased asset, lingering issues from certain closing conditions, and potential disputes of post-closing responsibilities for known liabilities which the parties knew about but did not disclose in the acquisition agreement. 

An escrow agent can help with some of these issues. An agreement can be structured so the escrow agent only releases a certain amount of money at the time the transaction is completed, and the rest at a later designated time. For example, if there is hesitation as to the vitality of a business that is being purchased, you could pay half of the transaction amount up front, and if the business meets at least 75% of estimated earnings in 6 months, then the remaining amount of money can be released. What we are attempting to protect the client from is a significant drop in the value of the purchased asset. Sometimes, all the due diligence in the world cannot protect the buyer from a drop in value if the information they received from the seller is dubious or incorrect. This false information leads into the issue of violations of representations and warranties. 

In an acquisition agreement, you will have to make representations and warranties as to capitalization of a business, intellectual property ownership, financial statements, general compliance, outstanding employment issues, ERISA, and relationships with vendors and any outstanding contracts. The key component is when a party must make a statement that no representation or warranty contains any untrue statement or omits to state a material fact. That statement can have consequences down the road if it can be shown either party omitted material facts or made untrue statements about certain issues, thus violating a representation or warranty. Now, these representation and warranty issues can be insured against, but this covers worst case scenarios and costs go beyond just the deductible payments. There also may be questions of whether such problems are even covered. In this instance, a delayed payment through the escrow agent may give time to fully vet and understand if any representations or warranties are going to be violated. After running the business for six months, you will have a large enough data set to judge if such issues may be a problem, and you’ll be much happier paying for something you know has consistent and uninterrupted value.

Closing conditions are standards that must be met in order for money to be distributed by the escrow agent and for the deal to be signed and completed. Sometimes the parties are in such a hurry to execute a deal that some of the conditions are met only nominally. To guard against this, pay attention to conditions that have been put in place, and use them as a checklist before signing the final acquisition agreement. A robust set of closing conditions can help mitigate the final issue of post-transaction dispute involving known liabilities. If a liability is known by either party prior to the completion of the transaction, it’s in both parties’ interests to make the handling of such issue a condition to closing. 

For example, the parties may make the assignment of a lease a condition to closing, or require the other party to submit to an audit to ensure all the finances and logistics are in order. The primary goal for the closing conditions and resolving known issues is to limit exposure for both parties so litigation does not happen immediately after the signing of the documents.

As we have explained, there are many pitfalls when it comes to running a business or using a property post-transaction. Some may be remedied by the utilization of an escrow agent and the various ways the escrow agreement can be structured. But most of the all, these issues require careful consideration by both the client and their attorneys. Otherwise, you’ll be stuck in litigation long after the parties signed documents.

Rustam Abedinzadeh

By

Rustam Abedinzadeh is an attorney at Pasha Law PC with deep experience in Employee Retirement Income Security Act (ERISA) litigation, hospital and emergency room collections, and healthcare contracting and compliance. He is also well-versed in solving legal issues that occasionally stem from day-to-day hospital and emergency room operations and has represented healthcare providers against health insurance companies concerning a wide range of topics.

Get Business Legal Updates

Please provide your full name.
Please provide a valid email address.
We respect your privacy, and we will never share your information. Unsubscribe at any time.

Related Publications

If you are considering buying a business or have already started the process, drop what you’re doing and tune in to our Behind The Buy podcast series. Lawyers and hosts Matt & Nasir take a buyer through the entire process, from the letter of intent through the final signing. Learn all the ups & downs…

May 19, 2021

“The good of the people is the greatest law.”Marcus Tullius Cicero, Roman statesman, lawyer, & scholar

February 18, 2021

After plenty of ups and downs, our buyer has finally closed on the purchase of their business. While we’re marking this down in the ‘wins’ column, it never hurts to review the game tape. In this final episode, our hosts, Matt Staub and Nasir Pasha, return to the deal almost a year later to reflect…

November 16, 2020

The ink is drying on the signature line and things are looking great for our buyer. After so much hard work, the finish line is in sight and the cheering within ear shot.   Though the landlord is still serving friction, things seem safe to move forward and for now, our buyer will be keeping…

September 15, 2020

Though things are coming along well, the journey would not be interesting if it was purely smooth sailing. After our buyer opens escrow, they are forced to push the closing date back when suddenly a letter from an attorney was received claiming the business, we are buying has a trade mark on the name!  Now…

July 31, 2020

As we go deeper into the buying process, we start to uncover more challenges from our seller and encounter some of the wrenches they are tossing our way. When we last left off in episode three our team was knee deep in due diligence for our buyer, had already penned and signed the Letter of…

May 11, 2020

The smell of brewing coffee and the idle chatter of customers as they sip their carefully crafted lattes and browse on their computers. The owner looks on as she wipes down the counter and watches a customer browse the bookshelves for a murder mystery novel. Her dream of owning her own business finally coming to…

April 11, 2020

One word–interloper! When a new mysterious broker enters the transaction and starts to kick up dust, Nasir and Matt take the reins. The seller signed off on the letter of intent (see episode 2), yet this “business broker” serves only friction and challenges by refusing to send financials, whilst demanding more of a firm commitment…

April 4, 2020

In recording this episode’s topic on the business buying process, Matt’s metaphor, in comparing the process to getting married probably went too far, but they do resemble one another. Listen to the episode for legal advice on buying a business.

March 12, 2019

Nasir and Matt cap off the week by discussing re-hire clauses in employer-employee settlement agreements and why they may be invalid as restrictions against non-compete agreements.

May 1, 2015

The guys end the week by talking about the patently unfair contracts that contestants for American Idol must sign.

February 6, 2015

There are plenty of websites, web-based apps, mobile-based apps, or other internet-based business that are actually profitable. A unique result of easy entry into these types of businesses is that it is more likely they will reach plateau below their potential due to the inexperience by the management of the original founders and developers. Relatively inexperienced…

January 27, 2015
Legally Sound Smart Business cover art

Legally Sound Smart Business

A business podcast with a legal twist

Legally Sound Smart Business is a podcast by Pasha Law PC covering different topics in business advice and news with a legal twist with attorneys Nasir Pasha and Matt Staub.
Apple Podcast badge
Google Podcast badge
Spotify Podcast badge

Latest Episodes

July 14, 2021

Through a five-round championship bout, Matt travels to Texas from California to determine which state is better for business. Will it be a knockout with a clear winner or will it go to the scorecards?

June 16, 2021

Covered in this episode of Legally Sound Smart Business are some typical business mistakes blunders small businesses often make and how to avoid them. Blunder #1: Copying and pasting agreements It may sound like a good idea at the time, but this blunder comes with hidden pitfalls. Having an attorney draft terms that are specific…

February 4, 2021

How you terminate an employee can make the difference between a graceful transition to avoidable negative outcomes like a dramatic exit or even a lawsuit. We gathered a panel of experts and asked them – is there a “right way” to fire an employee? We would like to thank our guests for this episode: Amr…

December 2, 2020

The COVID-19 pandemic has turned nearly every aspect of life on its head, and that certainly holds true for the business world. In this episode, Matt and Nasir explain how the early days of the pandemic felt like the Wild West and how the shifting legal playing field left a lot open to interpretation and…

November 16, 2020

After plenty of ups and downs, our buyer has finally closed on the purchase of their business. While we’re marking this down in the ‘wins’ column, it never hurts to review the game tape. In this final episode, our hosts, Matt Staub and Nasir Pasha, return to the deal almost a year later to reflect…

September 15, 2020

The ink is drying on the signature line and things are looking great for our buyer. After so much hard work, the finish line is in sight and the cheering within ear shot.   Though the landlord is still serving friction, things seem safe to move forward and for now, our buyer will be keeping…

July 31, 2020

Though things are coming along well, the journey would not be interesting if it was purely smooth sailing. After our buyer opens escrow, they are forced to push the closing date back when suddenly a letter from an attorney was received claiming the business, we are buying has a trade mark on the name!  Now…

June 12, 2020

With frustration at an all-time high and professionalism at an all-time low, our friend the Buyer has “had it” with the Seller and quite frankly their lack of knowledge. At present our Buyer is rightfully concerned that the latest misstep from our loose-lipped Seller will threaten not only the entire operation of the businesses but…

May 11, 2020

As we go deeper into the buying process, we start to uncover more challenges from our seller and encounter some of the wrenches they are tossing our way. When we last left off in episode three our team was knee deep in due diligence for our buyer, had already penned and signed the Letter of…

April 4, 2020

One word–interloper! When a new mysterious broker enters the transaction and starts to kick up dust, Nasir and Matt take the reins. The seller signed off on the letter of intent (see episode 2), yet this “business broker” serves only friction and challenges by refusing to send financials, whilst demanding more of a firm commitment…

April 4, 2020

Just as most stories and deals start out, everyone is optimistic, idealistic and full of hope for clear skies. It’s a perfect outlook with a perfect setup for the ups and downs yet to come. Peek further behind the curtain and into the first steps of buying a business: the letter of intent. After the…

April 4, 2020

When a savvy buyer hears opportunity knocking to purchase a prime positioned business, she decides not to go it alone and taps in the professionals to help navigate what could potentially be a fruitful acquisition. “Behind the Buy” is a truly rare and exclusive peak into the actual process, dangers, pitfalls and achievements, that can…

August 7, 2019

GrubHub is subject to two “matters of controversy” that have likely become common knowledge to business owners: “fake” orders and unfriendly microsites.

May 28, 2019

In this podcast episode, Matt and Nasir breakdown the legal issues of the subscription industry’s business on the internet. Resources A good 50-state survey for data breach notifications as of July 2018. California Auto-Renewal Law (July 2018) Privacy Policies Law by State Why Users of Ashley Madison May Not Sue for Data Breach [e210] Ultimate…

March 12, 2019

In recording this episode’s topic on the business buying process, Matt’s metaphor, in comparing the process to getting married probably went too far, but they do resemble one another. Listen to the episode for legal advice on buying a business.

December 3, 2018

Nasir and Matt return to discuss the different options available to companies looking to raise funds through general solicitation and crowdfunding. They discuss the rules associated with the various offerings under SEC regulations and state laws, as well as more informal arrangements. The two also discuss the intriguing story about a couple who raised over…

July 24, 2018

Flight Sim Labs, a software add-on creator for flight simulators, stepped into a PR disaster and possibly some substantial legal issues when it allegedly included a Trojan horse of sorts as malware to combat pirating of its $100 Airbus A320 software. The hidden test.exe file triggered anti-virus software for good reason as it was actually…

April 17, 2018

Attorneys Matt Staub and Nasir Pasha examine Mark Zuckerberg’s congressional hearings about the state of Facebook. The two also discuss Cambridge Analytica and the series of events that led to the congressional hearings, the former and current versions of Facebook’s Terms of Service, and how businesses should be handling data privacy. Full Podcast Transcript NASIR:…

March 10, 2018

The Trump presidency has led to a major increase in ICE immigration enforcement. It’s critical for business owners to both comply with and know their rights when it comes to an ICE audit or raid. Nasir, Matt, and Pasha Law attorney Karen McConville discuss how businesses can prepare for potential ICE action and how to…

February 5, 2018

New years always bring new laws. Effective January 1, 2018, California has made general contractors jointly liable for the unpaid wages, fringe benefits, and other benefit payments of a subcontractor. Nasir and Matt discuss who the new law applies to and how this affects all tiers in the general contractor-subcontractor relationship. Click here to learn…

January 2, 2018

With a seemingly endless amount of new mattress options becoming available, it is unsurprising that the market has become increasingly aggressive. As companies invest in more innovative solutions to get in front of customers, review sites, blogs and YouTube videos have moved to the forefront of how customers are deciding on their mattresses and how…

December 7, 2017

In recent months explosive amounts of high profile allegations of sexual harassment, assault, and varying acts of inappropriate behavior have transcended every sector of our professional world. With a deluge from Hollywood and politics, and the private workforce, accusations have inundated our feeds and mass media. This harassment watershed has not only been felt within…

November 16, 2017

If you are not familiar with the EB-5 program started in 1990 to give green cards to certain qualified investors in the United States, then you may not have been alone a few years ago. Currently, the EB-5 program has since exploded since its inception and now hits its quotas consistently each year. The program…

October 10, 2017

Government requests come in multiple forms. They can come in as requests for client information or even in the form of investigating your company or your employees. Requests for Client Information General Rule to Follow Without understanding the nuances of criminal and constitutional law and having to cite Supreme Court cases, any government requests for…

August 24, 2017

Nasir and Matt suit up to talk about everything pertaining to employee dress codes. They discuss the Federal laws that govern many rules for employers, as well as state specific nuances in California and other states. The two also emphasize the difficulty in identifyingreligious expression in dress and appearance, how gender-related dress codes have evolved…

June 28, 2017

Nasir and Matt discuss the life cycle of a negative online review. They talk about how businesses should properly respond, how to determine if the review is defamatory, the options available to seek removal of the review, how to identify anonymous reviewers, whether businesses can require clients to agree not to write negative reviews, and…

June 7, 2017

On this episode of the Ultimate Legal Breakdown, Nasir and Mattbreak down social media marketing withguests Tyler Sickmeyer and Kyle Weberof Fidelitas Development. They first discuss contests and promotionsand talk about where social media promotions can go wrong,when businesses are actually running an illegal lottery, and the importance of a soundterms and conditions. Next, they…

April 3, 2017

On this episode of the Ultimate Legal Breakdown, Nasir and Matt go in depth with the subscription box business. They discuss where subscription box companies have gone wrong(4:30), the importance of a specifically tailored terms and conditions(6:30), how to structure return policies (11:45), product liability concerns (14:45),the offensive and defensive side of intellectual property (19:00),…

February 1, 2017

Nasir and Matt discuss the suit against Apple that resultedfrom a car crashed caused by the use of FaceTime while driving. They also discuss howforeseeable use of apps can increase liability for companies. Full Podcast Transcript NASIR: Hi and welcome to Legally Sound Smart Business! I’m Nasir Pasha. MATT: And I’m Matt Staub. Two attorneys…

January 5, 2017

The guys kick in the new year by first discussing Cinnabon’s portrayal of Carrie Fisher as Princess Leia soon after her death, as well as other gaffes involving Prince and David Bowie. They alsotalk about right of publicity claims companies could be held liable for based on using someone’s name or likeness for commercial gain.

December 22, 2016

Nasir and Matt discuss the recent incidentat a Victoria’s Secret store where the store manager kicked out all black women after one black woman was caught shoplifting. They then each present dueling steps businesses should take when employees are accused of harassment.

December 8, 2016

Nasir and Matt return to talk about the different types of clients that may have outstanding invoices and how businesses can convert unpaid bills to getting paid.

November 10, 2016

After a long break, Nasir and Matt are back to discuss a Milwaukee frozen custard stand that is now revising it’s English only policy for employees. The guys also discuss how similar policies could be grounds for discrimination and what employers can do to revise their policies.

October 6, 2016

The guys discuss the new California law that allows actors to request the removal of their date of birth and birthdays on their IMDB page and why they think the law won’t last. They also discuss how age discrimination claims arise for business owner.

September 29, 2016

Nasir and Matt discuss the racial discrimination claims surroundingAirbnb and how it’s handled the situation. They also discuss some practical tips for businesses experiencing similar issues.

September 8, 2016

Nasir and Matt discuss whyAmazon seller accounts are getting suspended and banned without notice and how business owners can rectify this situation through a Corrective Action Plan.

August 25, 2016

Nasir and Matt talk about the accusations surroundingfashion giant Zararipping off the designs of independent artists like Tuesday Bassen and howsmaller companies can battle the industry giants.

August 18, 2016

Nasir and Matt discuss Brave Software’s ad replacing technology that has caught the eye of almost every national newspaper and has a potential copyright infringement claim looming. They also welcome digital marketing expert Matt Michaelree to speak on the specifics of what Brave is attempting to do and whether it has the answers moving forward.

July 28, 2016

Nasir and Matt discuss the sexual harassment lawsuit filed by Gretchen Carlson against Fox CEO Roger Ailes. They also talk aboutthe importance of sexual harassment training and properly handling such allegations in the office.

July 15, 2016

Nasir and Matt talk about the changes at Starbucks that have led to many disgruntled employees and customers.

June 23, 2016

Nasir and Matt discuss the criminal charges facing FedExinvolving the alleged transportation of illegal drugs. They also talk about how business owners should address working with customers that may be breaking the law.

June 15, 2016

The guys return after a long break to discuss why Yahoo is auctioning off over 3,000 patents and how this decision will affect the longevity of the company.

May 25, 2016

Nasir and Matt discuss the increase in the salary thresholdfor exempt employees and how employerscan try to avoid paying overtime as a result.

May 18, 2016

Nasir and Matt discuss the Baltimore law that makes it very difficult to operate food trucks in the city. They also discuss all the legal restrictions tohaving a food truck.

May 11, 2016

Matt listens to Nasir recap the developing battle in his hometown of Vandalia, Ohio over whether a Dunkin Donuts can move into a location in close proximity to a local favorite donut shop. They then discusswhether the issue is more legal or personal.

May 9, 2016

The guys kick off the week by discussing a Nevada employee who is claiming she was fired for not supporting the Scientology beliefs of her employer.

April 27, 2016

The guys discuss the massive floods in Houston,how employers responded, and why one meteorologist became a local hero. They also discuss the steps businesses should take in preparing for storms outside the workplace.

April 20, 2016

The guys discuss the boycott of Amazon over the products of an unnamed presidential candidate. They also talkabout how a business should handle a boycott and whether it’s possible to exit one unscathed.

April 13, 2016

Click here to read HubSpot’s response on this topic. Nasir and Matt discuss the trend in startups to compensate programmers and other early employees with stock options and how the company culture at HubSpot isn’t what it seems.

April 6, 2016

Nasir and Matt discuss various lawsuits against social media platforms in which users are accused of artificially inflating their social currency.

We represent businesses.
That’s all we do.

Oh, and we love it.

We love our work. We love reviewing that lease for your new location. We thrive on closing that acquisition that nearly fell through. We’re fulfilled when we structure a business to grow, raise capital, and be legally protected.

We focus on developing close relationships with our clients by being like business partners. A partner who provides essential, personalized, proactive legal support.

We do all of this without utilizing the traditional billable hour model. You pay for the value we bring, not the time spent on calls, emails, and meetings.

Our team is made up of attorneys and staff that share these values and we are retained by clients who want the same.

Pasha Law PC operates in the states of California, Illinois, New York, and Texas.

Meet Our Team

Fractional General Counsel Services

Pasha Law Select offers the expertise of a high-end general counsel legal team for every aspect of your business at a fixed monthly rate. Pasha Law Select is deliberately designed to allow our legal team to be proactive, to anticipate, and to be comprehensive in serving our clients. To be great lawyers, we need to know our clients. We can’t know our clients unless we represent a select number of clients in the long-term. This is Pasha Law Select.

Learn More