M&A Legal Tips And Best Practices: Understanding Earnest Deposits in Business Acquisitions

From a buy-side perspective, I prefer clients not put down a deposit. The seller is taking some risk by pulling their business off the market.
They're putting information at risk, even under an NDA.

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I prefer to tell the seller and demonstrate that you're a serious buyer.

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Rather than lock that money up in escrow, I would rather take that money and spend it on due diligence and resources that indicate I'm serious.
I don't want to park my acquisition capital in an escrow account.

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But keep the big picture in mind. If you’re interested in a strong HVAC company for $2 million, everyone wants that. You won’t make your offer more competitive by fighting the earnest money deposit.

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Sometimes you have to pay to play. Make sure you're clear about what happens with that deposit.
Business brokers tend to either care a ton about this or not at all.

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If they come from the middle market down to main street, they're not used to earnest money deposits in every deal.
If they're a former real estate agent turned business broker, they expect to see skin in the game.

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Sometimes it's easier to play along, protect your cash, and move forward.

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Do whatever you have to do to get the deal under LOI and dig in.
Pay close attention to deadlines. Sometimes we see 10% in earnest money, which is a huge amount.
It puts you at a disadvantage as a buyer when you’ve put that much money up.

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If the seller’s broker is holding those funds and they decide to keep them, you now have to hire a litigation attorney to get that money back. It becomes a nasty situation.

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