If you’re looking to buy or sell a profitable business, escrow is an appealing alternative to credit cards and wire transfers. Generally, online transactions are considered risky since you’re dealing with someone you barely know and who might be in another corner of the world. What if the seller doesn’t transfer you the ownership once he receives payment? What if you get something that bears no resemblance to the original listing? Using escrow can help you limit the uncertainty and proceed with greater confidence. So, what is escrow? We answer this question and more below.
What Is Escrow?
Escrow is a financial agreement where a neutral person or company temporarily holds money on behalf of the parties involved in a given transaction. A buyer and a seller agree to keep the funds in a secure escrow account. The funds are released when both parties have met the terms for their agreement. Essentially, escrow helps to ensure that payments are made in a way that satisfies both sides.
Escrow can take on several forms within its capacity, but the most important is online escrow, where an impartial company facilitates the trade of an internet-based business. As relatively few online transactions involve a face-to-face meeting of a buyer and seller, trust can be an issue for both parties. Online escrow ensures the buyer gets ownership, and the seller gets paid by having an impartial company hold the funds until both parties fulfill the obligations of their agreement.
Let’s say you’re buying a unique women’s website from an online seller. You may wish to review its assets (domain, physical inventory, images, etc.) before finalizing the purchase. At the same, the seller wants some assurance that they’ll not lose their precious business. Here’s where an online escrow comes in handy. You can transfer the money to an escrow provider’s account where it’ll be kept until you receive and approve the website’s assets. The seller, meanwhile, can have peace of mind knowing that the funds are available and good.
How Does Escrow Work?
To initiate an escrow, you’ll need to create an account with an online service like Escrow.com. By offering to collect the funds and hold on to them until both the buyer and seller are fully satisfied, online escrow services minimize the risk of fraud and increase both trust and security. Here’s how the transaction takes place:
- Both parties agree to terms
The seller initiates the transaction. Next, both parties register with an online escrow service and agree to the conditions of the transaction.
- Buyer deposits money
The buyer submits a payment using an approved payment method to the service provider’s account. The provider verifies the payment, and the seller gets an alert that money has been secured in escrow.
- Seller transfers assets to the buyer
Once the payment is verified, the seller hands over the assets and business information. Escrow service ensures that the buyer receives the assets.
- Buyer inspects the assets
The buyer gets a period to check that everything is as promised, during which they can report any issues with the assets of the business. The buyer accepts the assets after ensuring that they’re problem-free.
- Escrow service pays the seller
The escrow company transfers the funds to the seller from its secure escrow account.
The whole process is based on a step-by-step timeline that makes transactions speculation-free, as the involved parties can track the progress of the contractual terms and payment. Since a diligent third-party supervises the transactions, the seller’s offering and buyer’s funds remain in secure hands.
What Is an Escrow Account?
We’ve mentioned “escrow account” a few times, so you might be wondering if this is a special type of account for safeguarding the funds while a buyer and seller complete a transaction. It indeed is. When you open an escrow account, the funds you send or receive are held in a secure third-party trust account. This account protects you from all kinds of chargebacks, frauds, and wrongly described assets. Plus, every time you log into the account, status updates let you know where exactly the other party is in the transaction process.
Creating an escrow account is simple and easy. Once the other party agrees to a price, you simply register with an online escrow service, which provides you with an account. While some banks also offer the option to use escrow, traditional accounts are quite difficult and require a lot of paperwork to obtain. An online escrow eliminates most of these hassles by letting you register and check the transaction status in a few clicks.
Benefits of Creating an Escrow Account
Affordable option: Using an escrow account to send or receive payments is cheaper than other online payment methods, such as PayPal and credit cards.
Reduced risk: Most escrow companies comply with the regulations necessary to protect their customers from fraud. They’re also regularly audited by government bodies to ensure the validity and genuineness of their operation. So all the escrow accounts are usually protected.
Easy to use: The process of carrying out a transaction via escrow is simple. All you have to do is submit the payment details along with your email and phone, the length of the inspection period, and currency. Once done, you’ll choose a payment method that will be accepted and held by the escrow service until both parties have met the conditions of their agreement.
Multiple payment methods: It’s common for escrow companies to offer a variety of payment options, including credit cards, wire transfers, PayPal, money orders, and checks. You can pick from any of these options when paying for a business acquisition. Escrow services transfer funds to sellers via wire transfer after the successful completion of a transaction.
How Do I Create an Escrow Agreement?
An escrow agreement highlights the terms and conditions between a buyer and seller of a particular business. It also outlines the duties of the escrow company, such as when they should release the funds, what assets to verify, etc. In case you’re looking to acquire or sell a profitable business, make sure to modify the agreement and include things relevant to your specific deal.
Logistics and timeframe for closing – When should a buyer deposit money in escrow? What are the responsibilities of each party? Under what circumstances can the seller or buyer terminate the escrow agreement?
Applicable taxes – How do your local tax laws affect the purchase or sale of a business? Is there any applicable tax that may be levied on the proceeds generated through a sale? What about taxes on profits generated by a company that you recently acquired?
Terms on partial payments – What are the conditions for a hold-back? Does the seller receive partial payment for completing a milestone?
Details of the escrow company – What is the website of the escrow service? What are the service provider’s obligations and liabilities? How much does the provider charge for collecting and regulating funds?
List of assets included in the sale – Examples are domain names, social media accounts, customer email lists, product image files, platform subscriptions like Shopify, and add-ons like applications and tools.
After-sales support (if any) – What is the post-sale support timeline? How will the seller assist the buyer in the optimization of transferred assets?
The potential transfer of IP (Intellectual Property) – Does the seller hold intellectual property rights over a particular asset of the business? Will IP be a part of the sale?
Other terms – Is the seller open to sharing asset representations upfront? Will the buyer and seller offer guarantees or any indemnities?
Escrow companies typically draft their own agreements and ask all parties to review, sign, and return. If the buyer and seller have a Promissory Note, Purchase Agreement, or Asset Agreement, their escrow company should be able to integrate it into its agreement. Check with your escrow company if they have a specific agreement that you need to sign before initiating the purchase or sale process.
Some escrow companies also go lengths to ensure that there are no discrepancies in the information shared between all the involved parties. Plus, they facilitate the tracking of assets from transfer to acceptance. When you consider the value escrow companies may provide, using escrow while doing business can give you peace of mind.
How Long Does the Escrow Process Take?
Transacting an online business through an escrow company usually takes 5 to 20 days. This period provides the seller the time to transfer the assets and the buyer to ensure everything is as described. The length of the process depends upon:
- The buyer’s preferred payment method.
- The time set aside for asset inspection.
- Delivery time of the assets (from the seller to buyer).
- Whether the buyer needs extra time to accept the handover.
- Seller’s chosen disbursement method.
- Promptness and efficiency of the escrow service.
Exchange Has A Partnership with Escrow.com
Exchange Marketplace, powered by Shopify, makes it easy for you to buy and sell online businesses. You can trade established businesses with steady revenue, dropshipping stores with vendor integration, and more. Exchange has partnered with Escrow.com to ensure a smooth and trustworthy business handover.
To use Escrow.com’s services, the seller needs to create an escrow transaction in the Exchange app. This app initiates the process and escrow notifies the buyer to accept the terms and transfer money to the escrow company. Then the seller receives a notification to transfer assets to the buyer. The buyer marks all assets as “received” in escrow and performs their inspection period. If everything looks good, the buyer marks all assets as “accepted. Escrow.com then transfers the money to the seller, after which the buyer is made the new business owner within three business days.
As such, Escrow.com acts as an intermediary and safely keeps your money until both you and the other party (the seller or buyer) tell the company that you’re 100% satisfied with the deal. That’s when Escrow.com releases the money, and business ownership changes hands. If you’re the buyer, you receive an email confirmation when the business ownership transfer is complete. To make the transfer easy, make a checklist of all the things included in the deal, like what accounts and assets need to be exchanged, listing them one by one.
You can get in touch with Exchange’s customer service if you have questions about transferring a social media account, domain name, or any other asset. Escrow.com also provides excellent support in such cases. If you’re a buyer, make sure also to take advantage of the support offered by the seller, so you understand how to replicate their success, asking whatever questions you have before the deal completes. Once the escrow period is over, you’ll be the new owner of the business.
Important: Don’t start or encourage the other party to initiate a transaction outside of Exchange. If payment is made outside of Exchange’s Escrow.com flow, customer support can’t help you with any problems arising from that transaction. Even using Escrow.com outside of Exchange is considered external to the marketplace’s authorized payment flow. It’s also important to mention that Escrow is aware of Exchange transactions and will ask you to go through the process a second time, which could cost you additional fees.
Okay, that’s it – now you have all the insight into what is escrow and how it can help streamline the purchase or sale of online businesses. If we come full circle, interest and excitement are usually enough to tempt people away from secure online payment methods. But non-escrow payments always carry a risk that the buyer or seller may not fulfill their part of the deal once they get the money. Adding escrow to a transaction creates an additional layer of security that protects you from potential fraud. Whether you’re looking to acquire, broker, or sell, escrow is an extremely valuable resource for entrepreneurs all across the globe.