5 Ways Escrow Verifies Assets

The buyer is about to pay $500,000 for a business. The seller says the equipment is in good condition, the inventory is current, and the customer contracts are valid. The buyer wants to believe it, but they cannot afford to be wrong. This is where escrow verification comes in. At Secured Trust Escrow, we do not just hold funds. We verify that the assets being transferred match the description in the purchase agreement before we release a single dollar. Here are the five methods we use to protect buyers from receiving less than they paid for.

1. Physical Inspection and Inventory Count

The escrow company does not personally inspect the equipment, but they coordinate the inspection process. The purchase agreement specifies that the buyer has the right to inspect the assets before closing. The escrow instructions set a deadline for the inspection and require the buyer to submit a written acceptance or a list of deficiencies. If the buyer identifies problems, the escrow company holds the funds while the parties negotiate a repair credit, a price reduction, or a cure period. For inventory, the escrow company may require a physical count conducted by both parties or an independent third party. The count is compared to the inventory schedule in the purchase agreement. If the actual inventory is lower, the purchase price is adjusted or the missing items are excluded from the sale. This prevents the seller from depleting inventory after signing the agreement and before closing.

2. UCC Lien Search and Title Verification

A UCC search is the single most important verification step for tangible assets. The search reveals whether any lender has filed a financing statement claiming a security interest in the seller’s equipment, inventory, or accounts receivable. If the search reveals a lien, the escrow company requires a payoff letter from the secured lender and a filed UCC-3 termination statement before releasing funds. Without this step, the buyer could purchase assets that are still subject to a lender’s repossession rights. The escrow company also verifies that the seller has good title by reviewing the bill of sale and comparing it to the asset schedule. If the seller cannot produce proof of ownership for high-value equipment, the escrow company flags the issue and holds funds until the title is verified.

3. Document Review and Chain of Title

For intellectual property, the escrow company reviews the chain of title documents. This includes patent assignments, trademark registrations, copyright registrations, and software development agreements. The escrow officer verifies that the seller’s name matches the owner of record at the USPTO or Copyright Office. If there are co-inventors, co-authors, or prior assignees, the escrow company confirms that all necessary parties have signed the assignment documents. For software, the escrow company reviews the source code escrow agreement, if one exists, and confirms that the buyer is receiving the rights the seller claims to have. This document review is tedious but essential. A buyer who pays for a patent only to find out the seller was a co-inventor who needed the other inventor’s consent has a serious problem. Escrow catches this before the money moves.

4. Third-Party Confirmation

Some assets cannot be verified by looking at documents. The escrow company must contact third parties to confirm that the asset exists and is transferable. For leases, the escrow company contacts the landlord to confirm that the lease is current, that the rent is paid, and that the landlord will approve the assignment. For customer contracts, the escrow company may contact key customers to confirm that the contract is active and that the customer consents to the assignment. For vendor agreements, the escrow company verifies that the vendor will continue supplying the buyer after the transfer. For franchises, the escrow company confirms that the franchisor has approved the buyer and that the franchise agreement is in good standing. These third-party confirmations are time-consuming, but they are the only way to verify that the business relationships the buyer is paying for will continue after closing.

5. Financial Reconciliation and Tax Verification

The buyer is purchasing the accounts receivable along with the business. The seller claims there is $80,000 in outstanding invoices. The buyer needs to verify that these invoices are real, collectible, and not already paid. The escrow company may require an aging report and confirmation from key customers that the invoices are outstanding. For tax verification, the escrow company confirms that the seller has filed all required tax returns and that no tax liens exist. If the seller owes payroll taxes or sales taxes, the tax agency may have a claim against the business assets. The escrow company obtains tax clearance certificates or requires the seller to pay the taxes from the purchase funds before releasing the remainder. This financial reconciliation protects the buyer from inheriting the seller’s tax problems or paying for receivables that will never be collected.

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