Bulk Sales Escrow

Bulk Sales Escrow

Investopedia / Paige McLaughlin

What Is Bulk Sales Escrow?

Bulk sales escrow is an escrow arrangement where the proceeds from the sale of a company or its inventory are placed into a special account, which the seller is forbidden from accessing, to make sure any associated unsecured creditors get their due cash.

Typically used when a company is struggling, this agreement reduces the risk of the seller misappropriating the proceeds from the sale, to guaranty that the money is responsibly channeled towards paying off debts or taxes owed.

Key Takeaways

  • A bulk sales escrow is a financial agreement whereby a firm's revenues and/or inventories are held in escrow until creditors' claims have been satisfied.
  • Funds or assets held in escrow are temporarily transferred to and held by a third party, usually on behalf of a buyer and seller to facilitate a transaction.
  • Such an agreement may be utilized by a firm that is struggling in order to avoid default or another credit event.
  • Creditors may structure a bulk sales escrow to secure otherwise unsecured debts owed to them.

Understanding Bulk Sales Escrow

"In escrow" is a type of legal holding account for items, which can't be released until predetermined conditions are satisfied. Typically, items are held in escrow until the process involving a financial transaction has been completed.

When a company experiences financial difficulty, it may generate funds by downsizing its business, or by selling off portions of its inventory and/or business assets. To ensure that the proceeds from these liquidity events aren't wasted on further imprudent or unprofitable business decisions, a bulk sales escrow agent holds the funds until the transfer of the assets is complete, before forwarding the funds to the appropriate end parties. The relevant assets and cash will be held in escrow until all specified conditions, outlined in the bulk sales escrow agreement, are met, and transfer of ownership can occur.

Although the fees for this service are traditionally jointly paid by both the buyers and the sellers, the escrow agent may devise any payment model, as long as both parties agree to it.

Escrow agreements provide security by delegating an asset to an escrow agent for safekeeping until each party meets his or her contractual obligations.

Example of Bulk Sales Escrow

Let us assume that the XYZ Corporation has experienced several quarters of declining revenues, to lagging sales of obsolete products. To compensate for this loss, the company has been routinely borrowing large sums of money. Consequently, it becomes insolvent, because its liabilities far outweigh its assets. In order to remain afloat, the company sells off a chunk of its operations to another corporation.

Under these circumstances, XYZ Corporation's unsecured creditors may structure a bulk sales escrow agreement with the company, as a protective measure that gives them the comfort of knowing they’ll be the first in line to seize any money generated from that sale. 

If XYZ Corp. is somehow able to recover from its financial situation, the escrow agreement may be terminated upon its satisfaction and approval by its creditors. If, however, XYZ fails, the funds and assets held in escrow will be transferred to the creditors.

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