You can’t run before you learn to walk (though some of you out there may think you can do anything), and it’s almost impossible to understand what an escrow release is before learning what an escrow itself is. An escrow is a financial agreement between two parties that make financial transactions secure by using an escrow account. An escrow account is a neutral third-party used to release a sum of money inside of an account once the terms on both ends of an agreement are met.
Do you remember making a bet with your sibling or friend when you were younger? Maybe it was to see who could keep their tongue stuck to a metal post the longest in winter—à la A Christmas Story—or maybe it was who would be the first to eat dirt (look, we don’t make the rules). Whatever the situation was, you probably only bet a dollar, and given you probably had no money to speak of, a dollar was a significant amount. But before diving into whatever crazy bet you made with your bud, you asked your mom/dad/or older sibling to hold onto the dollars for you to ensure no cheating (you know what they say about cheaters…). This is essentially what an escrow is—a third-party person holding onto the money to ensure fair play.
In terms of finances, when a large company is looking to acquire a small brand, an escrow agreement may be put in place. Prior to the money from the large company being moved to the small brand in the acquisition, all terms of the escrow agreement (or acquisition agreement) must be met on both ends. Once all terms are met, the escrow release is initiated and the money is released to the small brand.
The Escrow Process
Like most things in life, there are processes put in place to make things go over smoothly. The below process for an escrow is in terms of the above example with a brand acquisition:
- Terms Agreed: First, the terms of the escrow agreement need to be agreed upon by both the buyer and seller. In the example of an acquisition, this includes both the large company and the small brand that is getting acquired.
- Money Moved: After the terms are agreed upon, the large company will move the large sum of money (the amount agreed upon in the acquisition terms) to an escrow account.
- Seller Provides: Once the money is moved to the escrow account, it is up to the brand to “provide” all of the assets outlined in the acquisition agreement to the buyer based on the terms of the agreement.
- Buyer Accepts: After the small brand “provides” all of the brand’s agreed upon assets to the buyer, the buyer needs to “accept” the assets.
- Escrow Release: Once the small brand “provides” and the “buyer” accepts, the money is released from the escrow to the small brand. Then, the escrow release is complete.
Escrow for Company Insiders
Company big wigs—you know the guys, company insiders, directors, and officers—may also have shares in the companies they work for. These shares are also escrowed and have a 3-4 year period before their shares in the company are released. However, only 15-20% of these shares are typically released every 6 months. Escrowed shares also pertain to large shareholders of companies. It’s important to note, however, that escrow releases are in place so that major shareholders are unable to sell all of their stock at one time (because who wants to make the rich richer?).
Small-cap investors should know when escrow releases happen so that they know to not sell their shares. This is because when the escrow releases occur, the cost of each share will increase, and you’re in it to make money—not lose it. Understanding and knowing when these releases happen will let small-cap investors know to buy-in at a later time when the shares are cheaper.
Escrow for Investments
Another way that escrow releases are used is through investments. Also known as escrowed shares, these are shares that are held independently in a third-party escrow account. Typically, these shares are held until one of the following occurs:
- Company Restructuring
- Company Acquisition
Understanding escrowed shares are important if you’re looking to put money into standalone companies, as the potential company changes mentioned above could impact when the shareholder receives their money.
Other Escrow Usages
An acquisition is one main usage occasion for an escrow and escrow release, however, there are other areas when having a “third-party” holding money is important.
- Home-Buying and Home-Selling: For those really into “adulting,” then an escrow is important for real estate purchases, as large sums of money are needed to buy a home. Before the money from the homebuyer is moved to the home seller, all agreements of the purchase must be met before the escrow release can take place.
- International Goods: Let’s be honest. Most of the things we buy come from overseas—”Made In the USA” where you at? When goods are being shipped across seas, escrow accounts are often used for assurance. Before the money is released from a buyer purchasing items overseas, an escrow agreement ensures that no money will be given to the seller until the goods are accounted for.
- Stock Market: Sometimes escrow accounts are used for stocks. If you purchase a stock in the market your shares could go into an escrow account for a certain amount of time. This means that that stockholder is unable to sell their shares for the period of time that the money is in the escrow account. This type of escrow account usually only pertains to employees who receive shares of the company they are working for.
Escrow accounts ensure the safety of money for both the buyer and the seller. However, having an escrow account also means that you will have an escrow officer—a middleman ensuring that the transaction process goes smoothly once the terms of the escrow agreement are met.
So, if your parent or older sibling served as your escrow officer back in the day for petty bets, then perhaps think about paying them their fees sometime soon.
Having an escrow account is a way to ensure that both the buyer and seller have all terms of their agreement met, and these terms need to be met before an escrow release can take place. Long-story-short, an escrow release is the issuing of money after agreement terms are met.
What to Look For to Make Money
Obviously you’re here because you want to make money. But how can you make sure you don’t lose money with an escrow account? Simple. Look for an escrow officer and an escrow account with minimal fees. Truth be told, escrow officers don’t do much beyond holding the money between both parties and ensuring that all terms of the escrow agreement are met—so make sure you’re not paying an arm and a leg.
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