Understanding What a Truly Neutral Closing Agent Looks Like in Your Transaction.

Dec 21, 2023

IBA, as the premier business brokerage firm in the Pacific Northwest, is firmly established as a respected professional service firm in the legal, accounting, banking, mergers & acquisitions, real estate, and financial planning communities.  Periodically, we will post guest blogs from professionals with knowledge to share for the good of owners of privately held companies & family-owned businesses. The following blog article has been provided by Jen Post. Ms. Post is the owner of Prestige Escrow (https://www.prestigeescrow.com/):

Understanding What a Truly Neutral Closing Agent Looks Like in Your Transaction.

When Buyers and Sellers come together with their brokers and attorneys to determine the terms of a business merger or acquisition transaction several important terms are negotiated.  One of those terms is the selection of an escrow closing agent to ultimately carry out the closing for the parties. The escrow closing agent, or “escrow” handles all of the money, gathering of pertinent payables, preparation of legal conveyance documents, entity verification, business, tax, and equipment lien research, and clearing of title in a transaction.

Escrow coordinates details between all parties; Buyer and Seller, brokers, attorneys, lender, accountants, payable vendors, lienholders, and more. Escrow’s role in the transaction is to be neutral and adhere to the instructions laid out in the purchase contract to carry out the closing.  Should escrow receive conflicting instructions, information, or if a dispute arises, the parties must work through any misunderstandings or discrepancies in clarity to provide congruent instructions for Escrow to proceed with closing.

For this reason, it is crucial that the escrow closing agent be a disinterested third party, meaning that there is no affiliation to any of the parties and escrow holds no financial interest or influence in the transaction.

Below are some examples of conflicts of interest:

Brokerage Owned Closing Agent

The principle of ABC Brokerage, Inc. owns ABC Escrow, Inc. John Smith is a broker at ABC Brokerage and represents a Seller as the Listing Broker for the sale of a construction business.

When an offer is received, John recommends that the transaction be closed by ABC Escrow because it is their in-house escrow company and preferential service is received on their closings.

Conflict: ABC Escrow is not neutral. Escrow is controlled by the Listing Brokerage and influenced by the Listing Broker and Seller, by affiliation. The Listing Brokerage has a primary interest in the closing which may be financial or otherwise. By virtue of the affiliation, this interest extends to the escrow agent and creates a serious conflict of interest. This would be equally problematic if ABC Brokerage represented the Buyer.

Client’s Attorney As Closing Agent

Attorney Bill Smith is the Buyer’s counsel and has contributed to the negotiation of terms and preparation of the Asset Purchase Agreement for a business purchase. Bill Smith also provides escrow closing services in his practice and has offered to close the transaction for the parties.

Conflict: Since Bill was part of the creation of the purchase contract, he is no longer a disinterested third party to the transaction.  He is essentially providing his own instructions to himself for the closing.  Additionally, based on him representing the Buyer, he is in no way neutral and has allegiance to one party over the other.

Title Insurer Escrow

XYZ Title is the title insurer for commercial real estate that is being closed in conjunction with a business sale. XYZ title has an escrow department that will be handling the closing.  XYZ Title is an insurance company and will be issuing an insurance policy to the Buyer, and Lender potentially, upon closing. XYZ Title has a primary interest in the transaction with regard to the insurance policy(ies) being issued and revenue generated by those policies.  Their primary interest is not in acting as escrow, but in generating title insurance policies.

A shocking number of closings occur where a conflict of interest exists in escrow, simply because Buyers, Sellers, and Brokers do not know to ask the question, are unaware of affiliations, or the information is not voluntarily disclosed to the parties.

Escrow agent neutrality is not actively regulated by any consumer protection agency in Washington state and so it is the responsibility of the consumer to select and vet a suitable closing agent deemed to be competent and neutral.

Additionally, escrow companies are licensed and regulated differently depending on their ownership umbrella.  Department of Financial Institutions (DFI) is the Washington regulatory authority responsible for overseeing independent escrow companies. DFI also regulates WA state banks, credit unions, and mortgage companies.  When escrow falls under an attorney or title company umbrella, the company and therefore transactions closed by that company, are not held to the same high regulatory standards as independent escrow companies who are regulated by DFI.

Across all businesses and industries there are professionals and there are “non”-professionals. Even in the M&A world where one would generally expect to be dealing with a higher level of savviness in business professionals – misunderstandings occur from time to time and conflicts can arise, and usually when one least expects.

With the whirlwind of information, details, and massive life changes occurring for Buyers and Sellers throughout the course of a transaction, the allegiance of the escrow agent or the safety of their funds held in trust, should never have to enter the clients’ mind or add complication to scenarios.

The following are qualifying questions that may be helpful when selecting an escrow agent:

  • Who is the escrow company owner(s)?
  • Is that person, people, or entity affiliated with any individual or entity that is a party to this transaction?
  • Does the potential closing agent have another primary interest?
  • Is there income being derived by the closing agent for anything other than the fee generated for performing the closing?
  • Is the escrow company licensed and actively regulated by any state agency?

As one may imagine, there is a plethora of details, figures, and logistics being coordinated at any given time to keep ahead of deadlines, ensure correct accountancy, and facilitate a smooth transition for the Buyer and Seller.

Every Buyer and Seller deserves the piece-of-mind that comes with never having to question the intention, integrity, allegiance, or neutrality of the closing agent when transacting one of the most important deals of their life.

If you have questions relating to the content of this article or the escrow process associated with selling or buying a business in Washington, Jen Post would welcome the opportunity to talk with you.  Ms. Post can be reached at (425) 745-1952 or jen@prestigeescrow.com.

IBA, the Pacific Northwest’s premier business brokerage firm since 1975, is available as an information resource to the media, business brokerage, mergers & acquisitions, real estate, accounting, legal, and financial planning communities on subjects relevant to the purchase & sale of privately held companies and family-owned businesses.  IBA is recognized as one of the best business brokerage firms in the nation based on its long track record of successfully negotiating “win-win” business sale transactions in environments of full disclosure employing “best practices”.