What Is It:
Escrow account is a broad term that means an impartial third party is responsible for holding funds or documents for a transaction, for the purpose of two other parties and then disbursing them only after certain agreed upon requirements are met. Basically, it allows a buyer to show his or her commitment by giving the money to a secure, uninvolved party, but also ensures that the seller fulfills his or her promises.
An escrow account is essentially a holding tank. During a transaction, the escrow officer—usually a lawyer or title company representative—holds all the important documents and deposits while the buyer and seller work out the details.
Do you have to use an escrow account?
Yes. For E1/E2 Visa, Investor must prove that funds are "irrevocably committed". It is crucial to get E1/E2 Visa. To satisfy this condition an investor must show that he is in process of buying a business. If an investor agrees to buy a business he or she will make an agreement with the seller. According the agreement the whole purchase price is placed in an escrow account which might be subjected to the approval of investor's visa. Obviously if you are denied for E2 visa, money from the escrow account is refunded. But in process of doing so you might loose the fee of lawyer and the broker.
An investor can obtain an E-2 visa through the creation of a new business.
In the case of a start-up business, an investor must spend all the funds necessary to start the business, and provide proof of payment and the source of funds to pay for each expenditure, such as receipts, etc. He must prove that the major portion of the investment is already invested in the business. Depending on the type of business, an investor may need to demonstrate that a considerable amount has been invested - whatever is necessary to start that type of business. This puts his money at risk.
Why It Matters:
All transactions are subject to contracts and other agreements. Escrow allows all involved parties to negotiate specific terms and deliverables from the outset.
The escrow agreement is the set of instructions the escrow agent uses to verify that all requirements have been satisfied.
The escrow officer makes sure the closing goes smoothly and everyone gets paid appropriately and efficiently what they’re owed (including, of course, the escrow officer himself, who typically gets a fee of 1% to 2% of the cost). After the closing, the escrow agent records the deed and title transfer.
Once you reach an agreement on the terms, you may sign contracts and receive the payment. At that time, you should open an escrow account for about 30 days to make sure all the terms of the contract are fulfilled.
At the closing of the sale, final documents are signed and the funds in escrow can be released. The fees to open and maintain an escrow account typically are split between the buyer and the seller.
Escrow Account Information & Laws
Some businesses are more at risk of succumbing to fraud than others. When you have a simple transaction that you undertake in person, there is less chance of being cheated out of your money or of final details being withheld. For example, if you're selling an ice cream truck, you hand over the truck and the title at the time you finalize the sale. Business sales made over the Internet, however, require more safety nets to ensure proper execution of the details of the sale. An escrow account is a legal tool you can employ to make sure the sale is on the up-and-up. The transfer of intellectual property, such as a domain name or client list, is less tangible and more at risk of default on the final agreement.
In addition to holding your money in a secured bank account, an escrow service often provides additional services. The final closing papers often take place in an escrow office where notary publics and attorneys are available. Final payments are easier to make immediately when you're physically in the office. An escrow agent can ensure clear title of properties being sold, prepare the closing paperwork and calculate all the payments. The escrow agent then writes checks and delivers them to the rightful parties. Coordinating the meeting and all final titles, payments, attorney obligations and closing documents can fall to the escrow agent.
How Escrow Protects You In A Business Transaction
In dealing with business sales, often times the seller or the buyer will ask about the use of an escrow company. The seller may say 'Why can't the buyer just pay me cash or give me a cashier’s check'?
Escrow does a number of things during the business for sale transaction that are designed to protect both the buyer and the seller. First, it is important for the seller to know that the buyer's earnest money deposit or good faith deposit actually has some cash behind it. Escrow will deposit the buyer's check and hold these funds in an escrow account until such time as the transaction closes or is cancelled by the buyer and seller.
On occasion, the buyer will discover during the due diligence period that the income of the business was overstated by the seller. The buyer may decide that the business will not generate sufficient cash flow for his/her needs and may choose to cancel the transaction. If the buyer has given the seller a cashier's check or cash as a deposit, there may be substantial difficulty in getting the deposit back. However, it is generally a simple process to have the deposit funds returned by Escrow.
It is important for the buyer to know if there are any liens against the business and if so to ensure they are paid by the seller. Escrow orders UCC searches to see that the seller doesn't have other liens or encumbrances against the assets of the business. Imagine if a buyer simply handed over a cashiers check for $200,000 only to find out six months later that there was an outstanding lien for $125,000 that had been recorded against the assets of the business. Additionally, Escrow ensures that a "Notice to Creditors of Bulk Sale" is published so that any other creditors can file any claims they may have against the business or the seller prior to the transaction closing. All of this is done to protect the buyer in the transaction.
The buyer's funds have to be deposited into escrow several days prior to the closing date. The funds may come from a lending institution, cashiers check, wire transfer. However, typically the funds are required a few days in advance. This is to protect the seller. There have been situations where buyers have paid sellers directly with cashier’s checks and then proceeded to the bank to stop payment. Since escrow requires the funds in advance, it prevents this type of situation from occurring.
There are many other benefits to using an escrow company and most legitimate business brokers will not be involved in transactions where buyers and sellers are transferring funds directly between themselves.
It is always a good idea to have an objective third party hold the funds, make sure there are no additional encumbrances against the business and make sure both the buyer and seller are in agreement on closing prior to releasing funds. After all, once the funds have been disbursed, there's no going back.
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