If you are negotiating to buy a business, then you are most likely interested in buying the assets without taking on any of the pre-existing liabilities such as debts, lawsuits, taxes, etc.
It is wise (and some say imperative) to require that a portion of the proceeds payable to the Seller be held in escrow in order to address any pre-existing liabilities that may arise at some point after you close the deal.
Step #1: Determine the amount of Seller’s proceeds to be escrowed that you feel adequately covers any pre-existing liabilities that concern you.
Step #2: Define which liabilities the escrow may be used to pay. For example: back taxes, outstanding vendor balances, employee claims, lawsuits relating to pre-closing matters, etc.
Step #3: Determine a timeframe for the escrow to be held. Generally, if no claims are made within such timeframe, then the money gets released back to Seller.
Step #4: Determine the procedure that must be followed in order to make a claim for any portion of the escrow to be released and used to pay a pre-existing liability of the Seller/business.
Step #5: Select an escrow agent who can be trusted to safeguard the escrow and carry out the disbursement instructions of the Buyer and Seller.
Keep in mind that typically the above steps will be subject to negotiation between Seller and Buyer, and escrow language will be included in the purchase agreement.
