Contract Deposits: Tips For Buyers When Buying A Small Business
Every business transaction requires a deposit from the business buyer to open escrow. While there isn’t a minimum, deposits in a purchase agreement are commonly between 5 and 10 percent of the business’s selling price with most brokers requiring a minimum of $5,000 - $10,000. Even deposits ranging from $2,000 - $4,000 may be considered low enough for a buyer to walk away from without any repercussions.
Some brokers prefer making the deposit and entering escrow before entering due diligence in order to prevent either side from walking away from the deal or taking the deposit.
Others believe that buyers should conduct due diligence and remove most if not all contingencies before entering escrow in order to avoid wasting time and resources if the deal were to ultimately not proceed.
Regardless of when escrow begins, the deposit should be placed into an escrow account because no escrow company will release or forfeit the deposit to either party without a written cancellation instruction signed by both the buyer and the seller, preventing any shady practices from either party.
While deposits are required, something that is often disputed is the idea that these deposits should be non-refundable. Regardless of when due diligence is conducted and when the funds are deposited into an escrow account, deposits should be fully refundable until all contingencies have been removed.
Purchase agreements should be reviewed by an attorney, CPA and due diligence specialist before being signed in order to protect the buyer from any grey area or language in their contract that may force them to unknowingly forfeit their deposit for any reason.
It is important to remember that very select scenarios should require a non-refundable deposit up front, and buying a business is not one of them.