Why do we take a deposit from a buyer when preparing and executing a Purchase Agreement Contract on a sale of a business?
The short, legal answer is that "without consideration a contract is unenforceable". The potential problem is that I negotiate and agree upon a price, terms and conditions to buy a business and sign an agreement with a seller but do not put up a deposit.
Tomorrow the seller changes his mind, doesn't want to sell or finds a buyer who will pay more money. The seller ignores your agreement and decides not to sell or goes on to buyer number 2 and you cannot enforce your original Purchase Agreement because there is no consideration.
How much consideration should I give as deposit?
One dollar can make it enforceable but it will only convince the seller that you as a buyer are not serious. As a broker I like to see a deposit of 5 to 10% of the purchase price. A minimum amount of $5,000 deposit with the offer. When I do open escrow I like to open with 10% of the purchase price. More on this below.
Are Deposits refundable and when?
In almost every case there are one or more contingencies in the Purchase Agreement. Until a buyers due diligence is satisfied the deposit should be refundable. Sellers need to cap the time period on due diligence and not let it drag on. After the buyer is satisfied with their due diligence I like them to sign off and remove that contingency. Thereafter deposits should not be refundable. An exception to this would be if the buyer cannot get approved by the landlord (a good broker should perform his own due diligence on the buyer and pre-qualify them).
Cashing Deposits and Opening Escrow:
I prefer to do the deal in this manner. My Purchase Agreement has buyer and seller authorizing me to hold the buyers deposit un-cashed until opening escrow. I have the buyer perform their due diligence before opening escrow. Once approved I open escrow and deposit their check with the escrow holder.
Return of Deposit to Buyer:
Once their deposit is in escrow and escrow is signed, no escrow company will release the deposit back to the buyer or forfeit it to the seller (even if it states the deposit is non-refundable) without a written cancellation instruction signed by both parties instructing the distribution of the deposit. When the market was in a frenzy a few years ago, many deals were done with a release of a pre-agreed amount of money to the seller upon opening of escrow (this cannot be done on any business with an ABC license). The early release of funds skirted the issue of signing a cancellation agreement later. It is hard to get a buyer to sign a cancellation forfeiting his money at a later time.
With all the above said; I feel it is best for all parties involved to perform due diligence, and remove all possible contingencies before opening escrow. Then once you go to escrow it is a very solid deal.
About The Author: Lee Petsas has been selling businesses with UBI Business Brokers in Orange County since 1981. In 1999 he became the Owner and Broker for UBI. He is still active daily in listing and selling businesses. He has been approved multiple times by Courts as an Expert Witness in the area of Business Valuations. You can reach Lee direct at 714-363-0440.
|Helpful Resources To Assist In Selling And Buying California Businesses|
|Diane Boudreau-Tschetter: Escrow & Bulk Sale Services - CA
California Business Escrow, Inc. is a full service independent escrow company serving all of California and has expertise in a wide range of escrows. Our team prides itself on providing an exceptional escrow experience. For more info phone Diane Boudreau-Tschetter at 888-383-3331 or 209-838-1100.
|Willard Michlin, CPA, Certified Fraud Examiner, Due Diligence
Willard Michlin, CPA #106752, offers buyers step by step training & assistance in doing Due Diligence Services when they are thinking of making an offer, or are in process of investigating a business purchase. He helps to determine the actual net profit even when there is cash. Call 805-428-2063.
|Peter Siegel, MBA, BizBen Founder, Lead Facilitator - ProBuy, ProSell
Founder & President Of BizBen.com (since 1994) & BizBenNetwork.com. I am the Lead Facilitator for the ProSell & ProBuy Programs on both platforms. I consult daily with business buyers, owner/sellers, and intermediaries daily about buying and selling businesses. Reach me direct at 925-785-3118.
|Shalonda Chappel-Pilgram: Escrow & Bulk Sale Services - Southern California
Escrow services to brokers/agents, sellers, & buyers. Established 43 years. Extraordinary service. Experienced with handling difficult transactions. One stop for all your escrow needs: Bulk sales, lien searches, UCC searches, liquor license transfers, publishing & recording services. 951-808-3972.
|Helen Yoo, New Century Escrow - Escrow Services In Southern California
New Century Escrow, Inc. is a fully licensed & bonded independent escrow company. Over 20 years combined experience in handling bulk escrow transactions. Multi-lingual staff that speaks your language, including Korean, Chinese, Vietnamese. Call Helen Yoo direct at 626-890-1151.
|Chuck Post: Laundry Buyer Representation, Consulting, Due Diligence
Chuck Post has 32 years experience in the laundry industry, specializing in assisting laundry buyers (and entrepreneurs) with buying or starting up, building, re-tooling, laundries throughout California. Laundry buyer representation, consulting, due-diligence, lease negotiations, laundry valuations.
|Larry Larsen: Laundry Consulting, Brokerage, Insurance - Southern California
I have over forty years of experience in the sales, ownership, management, and construction of coin laundries. He is a licensed broker active in the sale of coin laundries, a licensed insurance agent specializing in coin laundry insurance. Phone me at 714-630-9274 or 714-630-Wash.
|Joe Ranieri, Business Broker, Orange & LA County Areas
Having owned retail/restaurant businesses for over 20 years, my interest turned to listing and selling businesses rather than owning them. I specialize tend to specialize in Orange County high volume restaurants, fast food independents and chains, bars and liquor stores. Call 714-292-5448.
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