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Benefits of Utilizing an Escrow Agent

October 30, 2022
Benefits of Utilizing an Escrow Agent

Why You Should Use an Escrow Agent –

State governments license and regulate escrow agents. Escrow agents are subjected to an annual audit by a qualified public accountant and must abide by a strict code of conduct. During this audit work, the escrow holder is required to account for every penny received or disbursed. In most states, they must also undergo a criminal background check.

In addition, the majority of states mandate that escrow agents be bonded and meet the basic asset and liquidity standards. It is essential to have a reliable third party whenever large amounts of cash are being handled. Escrow agents are required to uphold confidentiality and privacy. In other words, they are able to escrow both money and information.

For instance, the vendor may be late or in arrears on licensing fees to their franchiser. These payments may need to be paid in full before the franchiser will accept the transfer of the franchise agreement.

In rare instances, the seller lacks the funds to pay the royalties prior to the closure. Therefore, the escrow holder must keep the down payment and pay the franchiser’s royalties prior to transferring the funds to the seller. The seller may prefer to keep the fact that royalties are unpaid private or confidential. We will not discuss if the seller should have revealed this as a substantial fact. The escrow agent would facilitate this.

The Fiduciary Relationship

Both the seller and the buyer have a fiduciary relationship with escrow agents. In contrast, professional advisors nearly always have a fiduciary responsibility with only one party. These professional advisors, such as accountants, attorneys, and brokers, are frequently bound by a stringent code of ethics that prohibits them from representing more than one party in a transaction – they typically consider this a conflict of interest. This would make it impossible for a professional advisor participating in the transaction to serve as the escrow agent, as they wouldn’t be an independent, unbiased, impartial third party.

Escrow agents must only carry out orders that are mutually agreed upon. A fiduciary relationship signifies that the administrator, or escrow agent, occupies a position of trust as well as legal responsibilities when managing finances or information. This connection needs absolute faith and reliance in the fiduciary for a specific transaction. Primarily for timing reasons, a fiduciary is required for the sale of businesses.

For instance, a fiduciary may keep funds or documents (such as a written lease or franchise contract) till the completion of specific events, or they may hold monies until certain events are accomplished and then release them. Contact us now to learn more about our escrow services.

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