Plan your closing early so you can protect your proceeds and move into your next chapter with confidence.
If you’re preparing to sell a business in California for the first time, “escrow” can sound like one more complicated step. In practice, escrow provides a structured way to hold documents and funds while the parties complete agreed closing requirements.
The details depend on the business, purchase agreement, and transaction structure. Your attorney, escrow officer, and tax professional handle the specifics. But knowing what to expect, and what you need to do, can make the process smoother.
WHAT ESCROW DOES
An escrow holder is a neutral party that follows written instructions from the buyer and seller. Escrow can receive the buyer’s funds, coordinate documents and payoff requests, track closing conditions, and distribute money when the agreed requirements are met.
Escrow does not decide whether your deal is fair or provide legal or tax advice. It follows the purchase agreement and escrow instructions. Make sure those documents explain what must happen before closing, what can be paid from the proceeds, and what happens if a requirement is still unresolved.
STEP 1: OPEN ESCROW AFTER THE AGREEMENT
Escrow commonly opens after the buyer and seller sign a purchase agreement. The agreement may require the buyer to deposit funds, often including an initial deposit, with the escrow holder. The parties then sign escrow instructions that describe how the transaction will be completed.
As the seller, provide accurate legal business names, ownership details, asset information, payoff contacts, and requested documents promptly. Confirm that the agreement and escrow instructions reflect the same deal terms. Differences between the two can create confusion or delay.
The opening of escrow does not mean the sale is complete. It starts the coordination of due diligence, approvals, clearances, and closing documents.
STEP 2: PREPARE THE CLOSING DOCUMENTS
The exact package varies, but commonly includes:
- The signed purchase agreement and escrow instructions
- A bill of sale transferring the agreed business assets
- Assignment documents for contracts, intellectual property, or other rights, where applicable
- A schedule of assets and any liabilities the buyer has expressly agreed to assume
- Payoff letters and lien-release documents
- Lease assignment and landlord consent, if required
- A closing statement showing the purchase price, adjustments, payoffs, holdbacks, and amount payable to you
- A promissory note and related security documents if part of the price will be paid over time
Review drafts carefully. Names, entity details, asset lists, dates, and payment instructions should be correct. Have your attorney review legal documents and ask your tax professional about the tax reporting and allocation questions relevant to your sale.
STEP 3: ADDRESS CALIFORNIA TAX AND NOTICE REQUIREMENTS
Some California business sales may be subject to the state’s Bulk Sales Law. Whether it applies depends on the facts and the type of business. When it does apply, the required notice generally must be completed at least 12 business days before the sale, with specified filing, publication, and delivery steps. Your attorney and escrow officer should confirm whether the law applies and coordinate the timing. See California Commercial Code section 6105.
Tax clearances are separate from bulk-sale notice. They also address different kinds of obligations:
- CDTFA: The seller should notify the California Department of Tax and Fee Administration of the sale, file final and outstanding returns, and address amounts due. The buyer or escrow may request a CDTFA tax and fee clearance. Depending on the circumstances, the buyer may need to withhold enough funds to cover the seller’s unpaid liability. Do not assume that simply opening escrow or filing a bulk-sale notice resolves tax exposure.
- EDD: If the seller has employees, the buyer may request an EDD Certificate of Release of Buyer, DE 2220. EDD advises that escrow funds should not be disbursed until seller liabilities are paid and the certificate is issued. The seller should coordinate final payroll filings and account closure with EDD; its business-sale guidance explains the steps.
- Franchise Tax Board: For certain bulk sales, a buyer or representative may request the FTB’s Buyer’s Withholding Clearance Certificate. It relates to specified withholding liabilities, not every possible tax or lien. Ask your tax professional and escrow officer which requests apply.
Start these requests early. Agency review, missing records, outstanding balances, or additional questions can affect timing.
STEP 4: CLEAR LIENS AND AGREE ON HOLDBACKS
A lender, equipment finance company, or other secured creditor may have a lien on business assets. Escrow typically requests payoff information, pays agreed amounts from the sale proceeds, and obtains the required release or termination documents.
A California Secretary of State UCC search can help identify financing statements. The search and payoff process should use the correct seller name and relevant business details. Your attorney and escrow officer can help determine what searches and releases are needed.
Some transactions also require a holdback: money kept in escrow temporarily rather than paid to the seller at closing. The purchase agreement should specify the purpose, amount, release conditions, and deadline. A holdback may address an outstanding clearance, claim, or post-closing adjustment. It is not the same as a buyer’s promissory note: a note is a buyer’s obligation to pay later under its terms, not cash already sitting in escrow.
Ask how each holdback or note affects your expected proceeds and what must happen before any retained funds are released.
STEP 5: CONFIRM THE LEASE, PERMITS, AND EMPLOYEE PLAN
If the business operates from leased premises, review the lease for assignment requirements and obtain the landlord’s written consent when required. The landlord may need financial information, a buyer application, or other documents. Begin early: waiting for consent can hold up the closing.
Licenses and permits are not automatically transferable just because the business is sold. Requirements vary by business and jurisdiction. Confirm what the buyer must apply for, renew, or obtain before taking over operations. The seller should not assume the buyer can operate under the seller’s permit or account.
For employees, coordinate the transition with the buyer and appropriate payroll and benefits professionals. Confirm who will employ each person after closing, when payroll responsibilities change, and how accrued wages, paid time off, benefits, and final payroll will be handled. The purchase agreement and applicable employment requirements should guide the plan.
STEP 6: REVIEW THE CLOSING STATEMENT AND MOVE TO CLOSING
Before closing, escrow prepares a settlement statement showing the purchase price and adjustments. It may include agreed prorations, inventory adjustments, creditor payoffs, taxes, escrow fees, holdbacks, and the amount due to you.
Review it against the purchase agreement. Ask about any figure you don’t recognize before authorizing final disbursement. Confirm the seller’s wiring instructions directly with escrow through a verified channel; do not rely on an unexpected email requesting a change.
On closing day, the parties complete and deliver the documents required by the agreement. Escrow confirms that required funds, approvals, and conditions are in place; pays authorized creditors or agencies; retains any agreed holdback; and distributes the remaining proceeds according to the written instructions. The buyer receives the bill of sale and other transfer documents specified for the transaction.
WHAT COMMONLY DELAYS A CLOSE?
The most common issues are late tax or lien requests, unpaid balances, missing releases, incorrect entity names, incomplete documents, delayed landlord consent, permit questions, disagreement over final adjustments, and unclear instructions for a note or holdback.
You can help keep things moving by responding promptly, sharing complete information, reviewing documents carefully, and asking questions as soon as something is unclear. A capable business broker in California can help keep communication organized, while your attorney, escrow officer, and tax professional address their respective areas. If you’re searching for “business brokers near me,” focus on experience with California transactions and clear, responsive guidance.
If you’re still preparing to sell, a free business valuation can help you understand your starting point. David’s business sale services include confidential guidance for owners planning a sale. You can also schedule a conversation or contact David to discuss next steps. Whether your buyer is local or based in Tampa, a clear closing plan helps everyone understand what must be completed.
With the right professionals and a well-managed checklist, escrow can make a complicated handoff more orderly. You’ll know what remains, what can affect your proceeds, and what needs to happen before the funds are released.
This article provides general information only and is not legal or tax advice. Requirements depend on the facts of your transaction. Consult your attorney, escrow officer, and tax professional.
ABOUT DAVID
David Mayfair is a Business Sales Advisor at SD Business Advisors. David Mayfair and his team have sold over 850 businesses since 2007. He learned about the industry when he became a business buyer in 2000. He offers a free, sale-focused valuation and a confidential, no-pressure process. Contact him at 650-304-1138.
