We thought it be helpful to discuss the various stages of the selling process as eventually most of you will be selling your business some day. In this edition we will cover the following topics:
1) receiving the offer,
2) responding to the offer,
3) acceptance of the offer, and
4) removal of contingencies.
1) Receiving the Offer – Once a business has been listed and marketed and a buyer is interested in acquiring the business we will write up an Asset Purchase Agreement Contract which the buyer will sign to be accompanied with an initial deposit check.. The Asset Purchase Contract spells out the terms and conditions of the sale and contains an expiration date.
2) Responding to the Offer – Upon receipt of the offer the seller has three options: 1) he can accept the offer by signing the contract, 2) he can write a counter offer changing the terms of the offer or 3) he can reject the offer by not responding to the offer. Once the seller receives the offer he will have a designated time spelled out in the contract to respond. If he doesn’t respond in the designated time the offer will terminate and any subsequent response will be considered a counter offer.
3) Acceptance of the Offer – Once the offer has been accepted by the seller the broker deposits the initial deposit check into escrow and the buyer has normally ten days or more to remove the contingencies described below.
4) Removal of Contingencies – Conditions need to be satisfied by the buyer before he increases his deposit to normally ten percent of the sales price and the actual escrow process begins. The standard contingencies include the following: 1) review of the businesses books and records, 2) physical inspection of the premises and 3) the landlords approval of assignment of the existing lease, modifying the existing lease or negotiating a new lease with the buyer. In some cases the transfer of special licenses such as ABC (Department of Alcoholic Beverage Control) license, entertainment license or approval of the franchisor (if a franchise) are required as additional contingencies. In some cases there may be a financing contingency where the buyer has a certain time to acquire necessary third party financing.
THE ESCROW PROCESS
An escrow is a process whereby there is a third party in a transaction, (the first and second parties are the buyer and seller), usually an escrow company, which is a neutral entity hired by buyer and seller to hold and disburse all monies in the transaction as well as to perform title procedures to assure that the sellers outstanding creditors will be paid and that the buyer will receive title free and clear of all liens and encumbrances. The escrow fees are usually paid 50/50 between buyer and seller and average between $1,200 to $1,500 depending on the size of the transaction. As provided by the Uniform Commercial Code of California, all monies (including consideration for stock inventory) must pass through escrow, and no monies can be released prior to close of escrow.
The escrow process consists of the items listed below:
1. Escrow Instructions – Once an offer is accepted, a copy of the signed offer and the buyer’s deposit is submitted to the escrow company. Upon receipt the escrow company sets up an escrow, issues an escrow number, issues a receipt for the deposit and generates escrow instructions. Escrow instructions must be signed by all parties and delivered into escrow, together with initial deposits, before the Notice of Bulk Transfer is published or recorded. The Notice of Bulk Sale is a document which is part of the escrow instructions authorizing the escrow company to publish in the newspaper an announcement regarding the pending sale which gives notice to the seller’s creditors to file any outstanding claims they have against the seller into escrow The creditors have twelve business days to file their claims against the seller into escrow once the notice is published. Any subsequent claims are filed against the seller after this period.
2. Tax and Lien Clearances – The escrow obtains clearance certificates from the Employment Development Department, State Board of Equalization and Franchise Tax Board thereby eliminating any seller tax liability spilling over to the buyer. Any secured liens against the business such as equipment leases, seller carry back notes, etc. must be paid off by the seller at the close of escrow
3. Escrow Closing Papers – The items listed below are included with Escrow Closing Papers.
A. The Bill of Sale – This document includes a list of all the fixtures and equipment included with the sale.
B. The Covenant Not to Compete – This document, if applicable in the transaction, prohibits the seller from competing within a certain radius of the subject business for a given period of time.
C. Closing Statement – One is prepared for the seller and one for the buyer and each statement breakdowns the total accounting of the transaction and shows the total debits and credits paid by each party. On the closing statement the following items are prorated: unsecured personal property taxes (taxes paid on the personal property), rent and real estate taxes, if applicable. The sales tax on the fixtures and equipment is paid by the buyer and the buyer usually allocates the purchase price subject to approval by the seller. The only portion of the sales price which is subject to sales tax is the fixtures and equipment.
D. Promissory Note – If part of the sales price is being carried back by the seller in the form of a note, escrow draws a promissory note which is secured by a security agreement (called a UCC1) which is recorded with the Secretary of State’s office and stays as a lien on the buyers business until the loan is paid off.
E. Inventory – Saleable inventory includes food, beverages (alcohol and non-alcoholic), paper supplies and cleaning supplies. These are paid for by the buyer usually at the sellers cost and an inventory is taken at the close of escrow to determine how much the buyer pays for these items.
F. Liquor License Transfer – If there is a liquor license transfer the escrow company must confirm that all the money is in escrow before they notify the Department of Alcoholic Beverage Control to complete processing the license transfer. The escrow must be notified that the liquor license has transferred before the escrow is closed. The escrow process is for the protection of all parties involved in the transaction and in our opinion a necessity.
The final steps in the eight step selling process are as follows:
1) obtaining licenses and setting up tax accounts, getting insurance in place, etc,
2) transferring licenses,
3) taking inventory and
4) closing escrow.
1. Obtaining Licenses, Setting Up Tax Accounts, Getting Insurance In Place, etc.– The buyer needs to apply for the following: a) resale permit from the State Board of Equalization, b) an affidavit of Fictitious Business Name with the county clerk, c) Business License with the local governmental office and d) an Employer’s Tax Identification Number with the State of California Employment Development Department. Also the buyer is to get his liability insurance in place and arrange to have the utilities changed to his name at the close of escrow.
2. Transferring Licenses – The ABC (Department of Alcoholic Beverage Control License) is transferred during the escrow process and we handle this process which normally takes about 6 to 8 weeks. We work closely with the buyer and ABC investigator through the entire process to assure that the license will be transferred in an expeditious manner. If there is a club sale there are other licenses such as entertainment licenses and dance licenses which need to be transferred and if there is a brewpub sale there are special alcohol manufacturing licenses which need to be transferred which we handle as well. Also if there is a franchise sale we need to get the approval of the franchisor of the proposed franchisee.
3. Taking Inventory – If salable inventory (food, beverage, cleaning and paper supplies) is being
transferred a physical inventory is taken by the buyer and seller immediately before the close of escrow. Salable inventory is paid to the seller at sellers cost in addition to the purchase price. An inventory of the fixtures and equipment is also taken by buyer and seller immediately before the close of escrow to assure that all the inventory indicated on the inventory list given to the buyer when the purchase contract was executed is there. Also the buyer checks all the equipment immediately before the close of escrow to assure that it is in good operating condition
4. Closing Escrow – Once all of the above items are complete the buyer calls us and tells us he is ready to close escrow and we call the title company and tell them to close escrow. We instruct the seller to give the buyer the keys and instruct the buyer to immediately change the locks.