The escrow agreement is often the last step in finalizing a business deal, but it’s also the most important. Learn about the types of business escrow accounts available and how they can help you protect your company’s assets.
Whether you’re acquiring another company to expand your business, purchasing new equipment, updating your facilities to better serve your clients, buying or selling commercial real estate, or selling your business to retire, an escrow account can help ensure the success of your business deal. In any of these situations, it’s important to manage the details.
Escrow accounts can benefit businesses in all stages, regardless of the size or complexity of the transaction. “Anytime you’re entering into a contract where money, goods, or property are being held for the benefit of another company or for a federal agency, you may need an escrow account,” says Amanda Wesley, Vice President, Escrow Services at Regions Bank.
A Neutral, Third Party Holds Assets and Facilitates Transactions
During the escrow process, a neutral third party is enlisted to act as an intermediary. The escrow agent keeps assets safe until all the conditions of a transaction between two parties are satisfied. This process benefits both the buyer and the seller because the escrow agent:
- Ensures that both parties in a transaction meet the requirements or milestones of the agreement before money or assets are released.
- Provides transparency and security for all of the transactions between the two parties.
- Can monitor complex, multi-year transactions to assure that all obligations are fulfilled before the settlement is finalized.
“The escrow agent makes both parties comfortable with the transaction they're entering into. Any disbursements that need to be made during the life of the transaction, any monies that need to be transferred, checks that need to be sent, everything comes to the escrow agent who makes the necessary money transfers,” explains Anthony Henry, Senior Vice President, Escrow Services Manager at Regions Bank.
Different Types of Escrows Meet a Variety of Business Needs
While the common element of all escrow accounts is a signed agreement between two parties — typically a buyer and a seller — the reasons for creating the agreement and its terms can vary widely. Below is a description of five of the most common types of escrows used by businesses today.
M&A (Mergers & Acquisitions) or Indemnity Escrow
Escrow accounts are absolutely essential for both the buyer and the seller whenever a business merger or acquisition takes place.
“Whether you are a multi-billion dollar publically traded corporation or a small business, an experienced escrow agent can be a key part of a complex buy sell transaction.” explains Julz Burgess, Head of Corporate Trust at Regions Bank.
A business that is acquiring another company typically wants to avoid unexpected encumbrances that might change the nature of the deal, such as liens or unresolved creditor claims against the assets of the business being purchased. An M&A escrow agreement can make sure that funds are set aside to protect the buyer from possible losses in such situations.
Environmental Escrow
If your business is involved in a project that directly affects the environment, chances are you have a need for an environmental escrow or a “stand by” escrow account. This type of escrow sets aside funds in accordance with federal or state environmental requirements.
1031 Exchange Escrow
If you’re buying and selling real estate, a 1031 exchange escrow can help you defer paying capital gains taxes on a property sale. By placing the proceeds with a Qualified Intermediary, it will ensure you abide by the IRS rules and help you purchase another property within the prescribe timeframes.
Collateral Deposit Escrow
Another common type of escrow is the collateral deposit escrow. “In this situation, the escrow agent holds the property of one party (such as stocks or money) as security to guarantee performance by the other party,” says Henry. For example, while the buyer of new machinery is waiting for its delivery, it may choose to put the payment for that machinery in escrow until the machinery actually arrives. Once it does, the escrow agent releases payment to the seller.
Retainage Escrow
Retainage escrow accounts are used by private businesses to assure that a contractor who is hired for a construction project finishes all of the required work. In this case, the escrow agent and account holds (or “retains”) a certain percentage of the final payment until the project is completed to the buyer’s satisfaction.
Some states have mandatory requirements for retainage, outlining when it applies and how much can or must be withheld. In Tennessee, for example, any private project where the cost exceeds $500,000 must set aside 5 percent in a retainage escrow. Still, property owners in any state can include retainage escrow requirements in their contracts when hiring a firm to work on their property.
With any type of escrow account, it’s important to choose a knowledgeable, experienced escrow agent to help your business navigate the nuances and requirements of an escrow agreement for your transaction. Using a bank with a dedicated escrow team safeguards the assets up to $250,000 through FDIC and ensures proper coordination with other accounts and services provided for the business.
At Regions Bank, we have a dedicated Escrow Services division with the experience and solutions to help you with your transaction. With a streamlined process, knowledgeable staff, and standardized documents, Regions Bank allows you to stay on your timeline with an expedited process.
Learn more about our escrow services, or contact a Corporate Trust Strategist:
- Cary Jones - Corporate Trust Strategist
404-548-5129 - cary.jones@regions.com - Troy Simmons - Corporate Trust Strategist
832-344-7994 - troy.simmons@regions.com
