Escrows and Funds Flow in Cannabis Business Sales

In a regulated transaction, the escrow isn’t a formality—it’s the engine that turns paper into a closed deal. This guide explains how cannabis escrow mechanics work from LOI to wire-out, how funds are sequenced on closing day, and which holdbacks protect buyers and sellers. If you’re pursuing an acquisition or exit, start by scanning live cannabis businesses for sale to benchmark structures and timelines, then use the frameworks below to assemble your escrow and funds-flow package.

Executive snapshot

• Escrow scope: neutral custody of deposits and purchase price, conditions tracking, lien payoffs, prorations, closing statements, and a documented wire plan.
• Deal paper drives money flow: Your LOI and APA (or equity purchase agreement) must spell out adjustments, prorations, holdbacks, and the post-close accounting clock (inventory, working capital, and QoE true-ups).
• Regulatory gating items: Local zoning/CUP requirements, change-of-ownership approvals, and premises control often sit on the escrow’s critical path.
• Credit lens: Predictable timing, clean payoff letters, and well-sized holdbacks protect EBITDA/SDE, reduce surprises in QoE, and sustain DSCR during transition.
• Controls matter: Wire-fraud prevention, dual authorization, and call-back verification are non-negotiable for cannabis transactions.

Deal structure dictates your escrow

Asset purchase (APA). Common when licenses/premises must remain with the current entity until approvals. Escrow disburses to sellers, lenders, tax agencies, and vendors according to an Escrow Disbursement Waterfall attached to the APA. You’ll also allocate purchase price across assets (inventory, equipment, IP, goodwill), which feeds tax filings and the post-close working-capital true-up.

Equity purchase. Faster on paper if approvals allow; escrow still manages payoff letters (debt, UCC liens), option redemptions, and seller distributions. Because the entity continues, ensure legacy liabilities and tax clearances are handled with targeted holdbacks and reps/warranties insurance (where available).

Hybrid / staged closings. In jurisdictions that require prior consent, you may fund into escrow and close in stages (possession vs. formal transfer). Your escrow instructions should define possession, risk of loss, interim covenants, and who controls cash and product during the gap.

Cannabis escrow: how the funds actually flow

A high-performing cannabis escrow has five components:

1. Deposits & earnest money. Earnest money lands in escrow per the LOI, is credited at close, and is refundable/non-refundable based on diligence gates (licensing, QoE, inspection).
2. Close conditions tracker. Escrow keeps a shared checklist: licensing steps, landlord consents, payoff letters, tax clearances, UCC terminations, CUP conditions, and insurance certificates.
3. Closing statements. Buyer’s and seller’s statements mirror the APA economics: price, prorations, credits, fees, and holdbacks.
4. Wire plan (funds flow memo). A single-page grid that shows every recipient, bank details, amounts, purpose, and legal basis (APA section or escrow instruction).
5. Evidence packet. Payoff letters, lien releases, estoppels/SNDAs, certificate packets, and final inventory/working-capital schedules.

Typical closing-day sequence (minute-by-minute)

1. Escrow receives buyer funds (purchase price + fees + verified reserve amounts).
2. Document package releases once conditions precedent are certified: fully executed APA/equity agreement, bill of sale/assignments, landlord documents, license change filings, officer certificates, and insurance binders.
3. Primary payoffs:
   • Senior lender payoff and UCC-3 filing instructions
   • Equipment lender payoff(s)
   • Landlord arrears (if any) or rent prorations
   • Taxes and agency clearances if required for closing (state/local)
4. Transaction costs: escrow fees, legal fees if directed, broker commissions per listing agreement.
5. Holdbacks funded to sub-escrows (indemnity, tax, inventory/working-capital adjustment, permit/close-out).
6. Net proceeds wired to seller wallets per allocation schedule.
7. Confirmations circulated (wire receipts, stamped filings, updated cap table/ownership ledger for equity deals).

The escrow disbursement waterfall (template you can reuse)

1. Secured creditor payoffs (attach payoff letters with per-diem interest and wiring instructions).
2. Landlord payments (arrears, TI reconciliation, or keys-for-consent consideration).
3. Governmental items (recording, transfer taxes/fees where applicable).
4. Transaction costs (escrow/title/attorney, brokerage, diligence vendors).
5. Operational prorations (utilities, prepaid SaaS, service contracts, inventory tax stamps where relevant).
6. Holdbacks & reserves
   • Indemnity holdback (12–24 months typical; size based on risk profile).
   • Working-capital/Inventory true-up (30–60 days post-close).
   • License/permit reserve (until stipulated approvals complete).
   • Specific risk reserve (e.g., known tax inquiry or vendor dispute).
7. Seller net wires (members/stockholders, option pools, 409A/bonus catch-ups if applicable).

Make this waterfall an exhibit to the escrow instructions; it removes ambiguity on closing day.

Core holdbacks (what they cover and how long)

• Indemnity holdback. Backs general reps (financial statements, IP, compliance) and special reps (no undisclosed liens, tax matters). Often 10–20% of enterprise value for 12–24 months; carve-outs for fraud and fundamental reps.
• Working-capital / inventory. Stabilizes post-close cash needs. The APA defines target net working capital and the calculation method; escrow holds a small reserve for the true-up delta. Tie inventory valuation to accepted costing (weighted average or FIFO) and clearly define obsolete/unsellable stock treatment.
• Regulatory approvals. Funds parked until change-of-ownership or location approvals settle. Release mechanics should cite objective milestones (agency letter, council vote, or time-based sunset).
• Taxes. Covers trailing sales/use/excise or payroll items through a defined audit period; release on clearance letter or statute date.

Inventory and cash at close: getting the count right

Inventory and cash require tight choreography so the funds flow matches reality:

• Cut-off and count. Freeze movements, run a blind physical count with dual custody, and reconcile to systems (seed-to-sale/POS/ERP).
• Pricing & tiers. Lock valuation rules in the APA: retail vs. wholesale price, discounts, excise treatment, and cost build for WIP/finished goods.
• Adjustments window. Define the post-close period (e.g., 30 days) for disputes and who arbitrates if you can’t resolve variances.
• Cash controls. Count safes and tills under camera, two signatures per envelope, and immediate deposit to the agreed operating account once possession changes.

Landlord, lender, and licensing dependencies

Escrow coordinates the non-negotiables that can strand capital if mishandled:

• Landlord documents. Estoppel, consent to assignment/sublease, and SNDA where financing is involved. Confirm permitted use encompasses licensed activity and any TI ownership language won’t trigger removal costs at exit.
• Lender items. Payoff letters (with UCC-3 instructions), collateral releases, and any forbearance or consent needed for closing.
• Licensing calendar. Many jurisdictions require local approvals (planning/police/fire) before state change-of-ownership. Your escrow should carry a dated checklist so wires don’t fly before approvals clear.

Wire-fraud and KYC controls (do these every time)

• Call-back verification on every first-time or changed wire instruction (phone number sourced independently).
• Dual approval for outgoing wires (deal team + finance).
• Bank-domain validation for PDF instructions (watch for look-alike domains).
• Staged funding (fund secured creditor payoffs first, then fees, then seller proceeds after confirmations).
• KYC package on counterparties (IDs, entity docs, beneficial ownership). This protects you and helps your bank’s AML team keep the channel open.

Working with the escrow holder: who, exactly, should hold the funds?

Depending on the state and the parties, acceptable escrow-holders include:

• Licensed escrow companies or title/settlement agents (common in asset deals tied to real property).
• Trust companies or banks with cannabis-capable policies.
• Attorney trust accounts (IOLTA or similar), where permitted.

Whomever you choose, insist on: (1) a written procedure for incoming/outgoing wires and verification, (2) a single point of contact, (3) same-day availability to balance both closing statements, and (4) clear authority limits for any changes to the waterfall.

Closing statements: how to read (and reconcile) them

You’ll review two statements—one for the buyer and one for the seller. They should:

• Mirror the APA math. Purchase price, deposits applied, credits, fees, taxes, and holdbacks must foot.
• Show prorations transparently. Rent, utilities, insurance, SaaS, tax stamps, and license fees split at 11:59:59 pm the day before close (or as agreed).
• Tie to the funds-flow memo. Each line should reference a wire on the grid. No orphan lines, no mystery fees.

Have finance re-perform the math and sign off before authorizing wires.

Sample funds-flow memo (structure)

Make the memo an exhibit to the escrow instructions and require written approval of all parties before edits.

Post-close: the 30–60–90 day accounting clock

• Day 1–10: Lock cash management; migrate bank mandates; initialize insurance COIs to new entities; load vendors into AP and confirm tax docs.
• Day 30–45: Complete inventory and working-capital true-up; sign the adjustment statement; release or top up reserve.
• Day 60–90: Close open permits/inspections; deliver any delayed consents; convert temporary approvals to final; begin indemnity claim window tracking.

Buyer and seller checklists (paste-ready)

Buyer

• Final APA/equity agreement signed; schedules complete
• License/ownership change filings submitted; local CUP/municipal steps calendared
• Payoff letters with per-diem; UCC-3 termination instructions
• Landlord estoppel/consent; SNDA if leveraged
• Closing statements reconciled; funds-flow memo approved
• Holdback instructions (indemnity, WC/inventory, approvals) signed
• Insurance binders active; loss-payee/additional insureds correct
• Wire-fraud controls in place; dual approval activated

Seller

• Corporate resolutions/consents; cap table and allocation schedule
• Tax IDs and reporting instructions (1099/filing responsibilities)
• Broker commission invoice/confirmations
• UCC payoff coordination; equipment lender releases scheduled
• Inventory/cash count plan agreed; cutoff time communicated
• Employee communications and payroll timing mapped to close
• Post-close access/transition services (if any) narrowly defined

Using 420 Property to pressure-test your plan

Keep your escrow and funds-flow assumptions grounded in reality. Browse active cannabis businesses for sale to see how sellers structure deposits, approvals, and closing timing. Use those comps to calibrate your LOI milestones, reserve sizes, and the complexity your escrow holder must manage.

Close cleanly, the first time. Build your escrow instructions, disbursement waterfall, and funds-flow memo alongside the APA. Size holdbacks to real risk, lock wire controls, and sequence regulatory approvals so you never wire into uncertainty. To source targets—or position your own exit—review current cannabis business listings on 420 Property and match your escrow plan to deals the market is clearing.

Disclaimer

This article is for educational purposes only and does not constitute legal, engineering, financial, or tax advice. Always consult qualified professionals and your local Authority Having Jurisdiction before making decisions.

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