Restaurant Escrow
Restaurant buyers and sellers use escrow to process the directions provided in the Letter of Intent or Purchase Agreement.
Escrow is the endgame of selling a restaurant. If you’ve conducted the sale’s previous steps carefully, this final stage should be relatively quick and easy. By the end of it, your restaurant will have a new owner.
Let’s begin with escrow basics.
What is escrow?
Escrow is a neutral third party used to protect all parties in a transaction.
The escrow officer takes care of disbursing funds, paying all creditors, and ensuring the buyer receives title free of any liens.
What about states that don’t use escrow?
Not all states use escrow. In some states, an attorney, title company, or real estate broker handles all or a portion of the transaction.
Opening Escrow
The Buyer or Seller will deliver the Purchase Agreement to escrow and open escrow.
The buyer is required to provide the deposit check to escrow.
The escrow officer creates an escrow account and provides an escrow number and escrow instructions for signature by both buyer and seller.
Escrow will require the following information from the seller and buyer:
From SELLER (Current Owner):
- Business Name & Address (Exact entity name or individual name)
- Doing Business As (DBA)
- All other business names and addresses used in the last three years
- Home/Forwarding Address, other than business address (EDD requirement for post-closing items)
- Tax I.D. Number (if corporation/entity) or Social Security Number (if an individual)
- Employment Development Department Account Number (If you have employees, we will need the EDD # to order the necessary release from the Employment Development Department)
- Sales Tax Permit Number (In connection with the State Board of Equalization)
- Copy of your Sellers Permit
- Allocation (Breakdown) of the Purchase Price
- Liquor License Number (If the transaction involves liquor license transfer)Contact Information (Phone number and e-mail address)
From BUYER:
- Deposit to open escrow, as agreed upon, made payable to Escrow Company
- Buyer’s Name & Address (This must be exact – If the buyer is forming an entity, we will need a copy of the Articles of Incorporation)
- Forwarding Address, for post-closing items (If different from above)
- Tax I.D. Number (if corporation/entity) or Social Security Number (if an individual)
- Employment Development Department Account Number (If you have employees, we will need the EDD # to order the necessary release from the Employment Development Department)
- Contact Information (Phone number and e-mail address)
What Happens in Escrow?
Upon receipt of signed escrow instructions, the escrow officer will publish a Notice of Bulk Transfer in a newspaper regarding the pending sale. The publication of Bulk Transfer provides notice to any creditors to file any outstanding claims against the seller.
Creditors have 12 days to file their claim with escrow.
Lease Assignment/ New Lease
The sale will require the seller to assign the current lease to the buyer, or the landlord and buyer negotiate a new contract. The landlord will need to approve the buyer.
The first step is to notify the landlord of the seller’s acceptance of an offer to sell the business and request an assignment of lease (or a new contract if applicable).
The lease agreement may provide the landlord’s requirements, such as a non-refundable fee, to consider the assignment.
The buyer should be prepared to provide a credit application and two or three years of tax returns for the landlord’s review. Check with the landlord to see what information will be required and if the buyer needs to use the landlord’s forms or a standard credit application.
Note:
Landlord approval of an assignment is often the biggest hurdle to selling a restaurant. For many different reasons, the landlord may be slow to respond or maybe less than cooperative.
If you provide the landlord with a financially stable and experienced buyer and run into a roadblock, seek the advice of an attorney specializing in commercial lease transactions.
Physical Inspection
The buyer should conduct a physical investigation of the premises as soon as possible if the research is not complete before escrow.
The buyer should provide written approval of the condition of premises and equipment. If issues arise, the seller can agree to fix the problem, give credit to the buyer, or hold firm on the sale price.
At this point, either the buyer or seller (or both) can decide not to move forward with the sale.
Liquor License Transfer
If you are transferring a liquor license, the buyer should complete the application with all the necessary information as soon as the escrow is open.
The seller will be required to provide certain information and signatures for the buyer to submit their application.
The buyer should work with a liquor license specialist to ensure a smooth process.
Tax and Lien Clearances
The escrow officer will obtain clearance certificates from taxing authorities such as the Employment Development Department, Franchise Tax Board, and State Board of Equalization.
Any liens recorded need to be paid before the close date. Most sales escrow will be required to hold back a portion of the sales proceeds to pay any taxes that may be due.
Escrow will often review the last two quarterly tax returns to estimate how much money needs to hold at the time of closing.
WARNING:
State Board of Equalization is often the cause of delays to close. File your returns as soon as possible. If you are delinquent, notify escrow as quickly as possible to determine a course of action to avoid additional delays.
Escrow submits a request for a release from the State Board of Equalization (“BOE”) because the seller will need to file his final return and pay sales tax on the fixtures and equipment.
The BOE has 60 days to reply to the request with either a release or demand with any amounts owed.
UCC Search & Tax Lien Search
A UCC-1 financing statement (an abbreviation for Uniform Commercial Code-1) is a legal form that a creditor files to give notice that it has or may have an interest in the personal property).
Escrow will order a UCC search, and tax lien search to determine if there are any creditors or tax agencies that currently have liens on any assets.
Final Walk-Through
Schedule a final walk-through a few days before the close date. The buyer will confirm that the fixtures and equipment are all present and in good working condition. Value the remaining stock If the inventory is part of the sale.
The buyer and seller will notify in writing that they are ready to close. The escrow officer will prepare the closing papers, which include the following:
Bill of Sale. For the equipment and fixtures.
Closing Statement. The closing statement provides both buyer and seller a breakdown of the accounting showing the total credits and debits paid by each party.
Promissory Note. A promissory note is prepared and secured by a UCC1 security agreement if you provide a loan for part of the purchase price.
Inventory. The buyer will pay for the stock, if applicable.
Liquor license transfer. If the sale includes a liquor license, escrow will complete the processing of the liquor license.
Once all of the above is complete, escrow will disburse funds, and the seller provides the keys to the buyer.
Would you like a step-by-step guide to sell your restaurant?
Nasir Javed says
That was a great article. I’m a new agent and I’ve been learning to specialize in business sales. I’ve sold one restaurant and am about to jump on to my second sale. Very Helpfull!
Mark Chase says
Thanks Nasir. Glad it was helpful and congratulations on your business!
Liss hawes says
Thinking about selling my restaurant thanksfor this info feel better. Tis stressful
Mark Chase says
Where is it located??
Debbie says
partner on a restaurant. Did not last long. Sold restaurant but the lawyer is holding all funds till partner ok to release. Partner will not release funds till taxes and vendors been paid. I am ok with that except he does not need to hold the whole amount (sale price $110K). Where do I go from here to at least have partner release some funds?
any advise would be appreciate
Mark Chase says
Hi Debbie..I replied via email.
David says
Selling our restaurant to family member. We have agreed upon price, “as is”, and will be holding mortgage. We are hiring private attorney to write up purchase and sales agreement and mortgage.
What is your opinion on 50/50 split on end of year profits to go toward principal reduction as a means of offsetting only a 10% down payment vs. 20%?
Mark Chase says
It sounds fair to me. You may want to spell out what happens if there are no profits. Will there still be a minimum payment required?
jimmy says
Hello, I own a business that’s shut down. I’m ready to fire sell it and buyers are ready. Just discovered previous owner has filed a UCC3 continuation based on an old UCC. Can this stop me from having landlord and buyer make a new lease and moving ahead with this deal?
mike says
I sold my business 2 years ago thru an escrow company. I was contacted by the County that I still owe Unsecured property tax, and there is heavy penalty assessed to it because of the lateness. Do I have any legal recourse on this, due to the fact that the escrow company has followed all procedures according to state law (as the Bill of sales and publications are done correctly)? The taxes seemed to be recorded right after the time of close of escrow, so I can see some timing issue.
Mark says
What is a customary deposit on an LOI?
Mark Chase says
If you are writing offer to purchase assets or existing business 10% of sales price is normal. If you are writing offer to lease a vacant restaurant no deposit is typically required.
Maurice Pessah says
Mark,
This is an excellent article ! I am in the process of purchasing a restaurant in the Bay Area ( San Jose) directly from the owners as they do not want any brokers involvement to save some money !This will make the negotiation and transaction much harder as we will need to have a sales agreement, etc … and possible lawyers involved as i need to protect my interest. So do you offer any consultation services for a fee as i have many questions ?and hoping you can help. Please let me know asap. i could be reached at (408) 205-1201
Thank you kindly.
Selin says
Hi Mark,
Thank you for your great article , it is very helpful, I wish I could read that before buying a restaurant.
We started to operate an existing franchise restaurant since May in los Angels California, just few days after that the escrow opened, and paid the rent starting May(we signed a two years lease contract).
Starting the first day, we had lots of issues with equipments, some of them didn’t work for several years like AC, hood, and some of them stopped to work. We hired several specialist to fix them but they were keep telling us it’s not worthed and we should buy the new ones. We ask the seller to fix them or reduce the price of the business but she disagrees. In the other hand the escrow, after two months, still is open because seller has lots of unpaid amounts to IRS and EDD.
We want to back out from the escrow but seller disagrees, she doesn’t want to negotiate.
This bussines price is $230k plus franchise other fees which is more than $250k(franchise is very mess and not helpful, we didn’tknow until we started to work with them).
I know it is late, we lost more than $20k so far and we will lose more but Please give us an advice.
We will be appreciate for your help
Thank you
SARA says
I purchased a restaurant 1 year ago by taking over the current lease (which ends in November) and paid the purchase price to the previous owner. The previous owner purchased the restaurant from the Landlord as the space was empty. Now I am planning on moving to another location and want to know what I can expect in “selling” back the restaurant to the Landlord. Does he actually buy it back at the price the original owner bought it for?
Mark Chase says
Typically you would sell the assets with lease or business to another operator. Since you only have a few months left on your lease there is very little value in the assets/business unless the landlord will provide an extension to your lease or new lease to the buyer. If you move you are entitled to remove any fixtures that are not permanently attached. The hood and grease interceptor would remain property of landlord. I would first approach landlord and ask if they are open to extending lease. If so, you can then notify landlord you want to sell the assets to recoup some of your investment and see if they will cooperate in the sale and provide a new lease. If not, ask if they want to buy your equipment so that they can lease it as a turn-key restaurant and possibly collect key money. Let me know how it works out..Best of luck.
Sean says
Thanks. Does a landlord have to know about A installment loan to new buyer if seller is going to let new buyer make payments?
Mark Chase says
No the loan is a separate agreement between buyer and seller.
Siyao says
Thanks for the great article!! It really clears things up about buying and selling restaurants!
I am trying to purchase a tea shop (equipments and assets and will sign a new lease with the landlord).
1.Where would you suggest finding a good Escrow service? Any recommendations?
2.What is the fee normally (in percentage of the price)?
3.There is some contingency on the deal (pending approval by the city), so we establish the terms in our purchase agreement to pay the deposit and release the deposit month by month to the seller as the permit process could take a while, can we use an escrow for releasing the deposit or is it only on the final purchase price?
Marina says
Thank you very much! Great articles. Right now prepare for sale two restaurants in Thailand. It helps a lot.