Business Escrow
California business owners have two main ways to cash out: sell the assets through a business escrow, or sell the stock via a stock purchase agreement. Each path triggers different escrow mechanics, tax outcomes and liability exposure. Pick the wrong wrapper and the seller can lose hundreds of basis points in net proceeds while the buyer inherits unknown contingent claims.
In an asset sale the buyer forms a new entity and purchases hard assets, contracts and goodwill. The transaction is closed through a licensed business escrow company that holds the purchase money, publishes the bulk sale notice, files state tax releases and disburses funds only after all conditions are satisfied. Escrow fees average 0.15 % to 0.25 % of enterprise value and are usually split 50/50. The escrow holder also handles post closing adjustments such as inventory true ups or prorated receivables.
A stock sale is different. The buyer purchases the equity of the existing corporation or LLC and steps directly into the seller’s shoes. Because the legal entity survives, there is no statutory bulk sale process; the parties can close attorney to attorney using a trust account or by opening a holding escrow with a California DFPI licensed provider. Many buyers still prefer a formal escrow so that rep and warranty claims can be chased against retained cash.
Key Differences at a Glance
- Tax Basis Step Up: Asset sale gives buyer new depreciable basis; stock sale does not
- Liability Assumption: Stock buyer inherits all unknown liabilities; asset buyer generally does not
- Third Party Consents: Asset deals require customer and vendor consent assignments; stock deals rarely do
- Escrow Duration: Asset escrow typically 12 to 18 months; stock escrow tied to indemnity caps, often 24 months
- California Tax Clearance: Mandatory in asset sales; optional but recommended in stock sales
From an escrow perspective, the asset route is more labor intensive. The escrow holder must publish the bulk sale notice in a newspaper of general circulation, wait 12 business days for creditor claims, obtain a tax clearance certificate from the California Department of Tax and Fee Administration, and coordinate lien releases on equipment and vehicles. That process adds roughly three weeks to the closing timeline but provides the buyer with statutory protection against undisclosed claims.
Stock escrows move faster because there is no bulk sale statute, yet buyers demand longer survival periods for indemnity claims. A typical stock purchase agreement will retain 10 % of the purchase price for 18 to 24 months, compared with 6 to 12 months for asset deals. The escrow agreement must therefore include detailed indemnity procedures: notice periods, dispute thresholds, and arbitration clauses. Secured Trust Escrow maintains separate collateral accounts for tax indemnities versus general indemnities so that a single IRS audit does not lock up the entire reserve.
Sellers often favor stock sales to obtain capital gains treatment on the entire consideration and to avoid double taxation at the corporate level. Buyers prefer asset sales to obtain a stepped up basis and to isolate legacy liabilities. Hybrid structures such as a stock sale followed by a Section 338(h)(10) election attempt to bridge the gap but require sophisticated escrow language to handle the deemed asset sale for tax purposes while maintaining stock treatment for legal title.
Regardless of structure, California requires that any escrow holding more than $3.5 million in customer funds must be bonded and audited annually. Both parties should verify the escrow holder’s license status on the DFPI website before wiring funds. Secured Trust Escrow maintains separate operating and reserve accounts for every business transaction and provides monthly reconciliation reports to buyer and seller counsel.
Bottom line: choose the structure first, then design the escrow around the risks you are trying to solve. Asset sale escrows emphasize tax clearance and bulk sale compliance; stock escrows emphasize indemnity survival and dispute resolution. Secured Trust Escrow has closed over 900 California business sales and maintains template escrow agreements for both asset and stock formats. Reach out today for a side by side fee and timeline comparison before you sign the letter of intent.
