Escrow, escrow, who's got the escrow... how to buy a business mail order restaurant service


After receiving a few emails regarding escrow deposits, I thought I would address this for you.

When you are attempting to purchase a business, you usually put up an 'earnest money deposit' to be placed in escrow. The deposit money does not belong to the seller. The last person you want to give it to, to hold onto until closing (settlement, passing of papers) is the seller! If the deal sours and the seller has already used the money ("Oh, he told you it would go into a special fund? It did...") it may be extremely difficult to get your deposit back. Perhaps in the seller's mind he thought it was his to keep.

Give it to a third party to hold! If you are buying a FSBO (for sale by owner) give it to an escrow agent, escrow title company, attorney, or you can go to the bank and set up a special escrow account. (This may vary by state law. I just tried to put a deposit into it's own escrow account and the bank will not let 'escrow' be on the account as it implied they were the escrow agent and they want no liability or part of a dispute.)

If you are using a state licensed broker, the brokerage is very specifically regulated as to what they can and cannot do with this deposit money. Most licensed brokers have a separate account for escrow deposits only. They may not commingle those funds with their working account. They are subject to spot inspections without notice from the state. (If they don't have a real estate broker's license, they do not have to worry. You do...) If there is a dispute over the deposit, the escrow agent may not be able to release the funds to anyone without consent from all parties.

In most instances the escrow is placed in a 'non-interest-bearing' account. The escrow agent does not earn interest, the seller does not and the buyer does not. Just the bank! If it is a sizable deposit you may ask to have it placed in it's own escrow account and pay for the costs associated to set that up. The costs could be $20-200 depending on bank and state. But if you are putting up $50,000 for 3-6 months until closing, I too would want the interest.

I worked for one company that had their escrow account set up to bear interest. (This was disclosed in all documents signed by buyers and sellers.) The interest was paid every year to Muscular Dystrophy or the American Cancer Society. It sure felt nice to be part of a company that was able to hand over 10-20 thousand dollars in 'found' money to a great cause. I also support the Animal Shelters and Humane Society so I would be happy to put the interest there.

As a buyer you have the right to ask where the money will be held, the name of the bank and the account number. It's no big secret! If someone does not want to disclose that or if you are the least bit uneasy, pay $1,000 and have an attorney hold the deposit money. Fifteen years ago when the boat brokerage industry was unregulated in Florida, I gave a boat broker a ten thousand dollar bank check on an offer I made on a boat. The offer was not accepted and I asked for my deposit back. It took six weeks... the first check I was given bounced. It was not drawn on an escrow account but a general business account. A few war stories like that is what caused regulation in many industries.

The above comments are my opinion. For local custom and law, consult with an attorney or call your State Attorney General's Office.

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