An escrow is a financial arrangement where a third party holds and regulates payment of the funds required for two parties involved in a given transaction. It helps make transactions more secure by keeping the payment in a secure escrow account which is only released when all of the terms of an agreement are met as overseen by the escrow company.
Escrows are very useful in the case of a transaction where a large amount of money is involved and a certain number of obligations need to be fulfilled before a payment is released. For example, the sale of a financial advisory practice often contains an attrition clause which requires certain metrics to be met before a portion of the purchase price is paid to the Seller.
The funds necessary to pay the Seller are held in the Escrow Account and released upon the agreed upon transfer date. The Seller, upon the sale of the financial advisory practice, will know that the funds are available rather than wondering if the buyer has the funds.
Using professionals who understand financial advisory practice transactions reduces the risk of fraud or non-payment by acting as a trusted third-party that collects, holds and only disburses funds when both the buyer and seller are satisfied. Our partner law firm, Kotz Sangster Wysocki, P.C., has extensive experience in the financial services industry and will act as the escrow agent. Here is how it generally works when the buyer is using bank financing (most common method) to purchase the practice:
- All parties agree to the terms of the transaction.
- The buyer or seller initiates the escrow account (for SBA loans, the seller must initiate the escrow account).
- The buyer (or bank) submits payment to the escrow agent by an approved payment method which is typically a wire transfer.
- Escrow agent verifies the payment is in good order.
- The seller is notified by the escrow agent that funds have been secured ‘In Escrow’.
- The seller transfers ownership of the financial advisory practice to the buyer.
- Escrow agent releases the agreed upon funds (generally the down payment) to the seller from the escrow account. Timing of the release will depend upon the availability of the funds.
- The remaining funds are released to the seller subject to the terms of the escrow agreement.
- If there is a conflict on how much and timing of the release of funds, the escrow agent will deliver the funds to the agreed upon court which has jurisdiction as agreed upon by the buyer and seller in the escrow agreement.