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

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.

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

‍
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.

‍
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.

‍
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.

‍
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.

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

‍
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.

‍
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.

‍

‍