Deposits With Purchase Agreements - Rules And Guidelines
Why do we take a deposit from a buyer when preparing and executing a Purchase Agreement Contract on a sale of a business? Categories: BizBen Blog Contributor, Business Broker Information, Buying A Business, Deal And Escrow Issues, How To Buy A Business, How To Sell A Business Contributor:
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.
A while back, one of our Transworld offices in Florida received a deposit from a buyer for a substantial amount of money. It was drawn on a major bank, with a very legitimate-looking check, from an apparently legitimate account. We assume that the buyer thought the check would be held, un-cashed, during due diligence; but, as specified in writing in the contract, the escrow agent deposited it. Lo and behold, the check was bogus, the account was bogus, and the buying company was bogus! Needless to say, the fraudulent buyer spent some time as an unhappy "guest" of the State of Florida for their criminal activity.
So, I find that the only way to protect the seller from a potentially fraudulent buyer is to obtain a reasonable good faith deposit and have the escrow agent deposit it. In fact, we routinely have the offeror wire the funds to the escrow agent in order to speed up the process, because time kills deals.
| Helpful Resources To Assist In Selling And Buying California Businesses |
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William F. Ziprick, Attorney: Legal Services For Buyers And Sellers Through creative problem solving, attention to detail, accessibility, & understanding that unnecessary delay is often a deal killer, I work closely with my clients and other professionals to consistently achieve a high rate of closings. Office: 909-255-8353, Cell: 509-951-7230. |
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Shalonda Chappel: 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. |
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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. |
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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. |
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Jack Oh, Business Broker: Southern California Business broker and real estate services in the Los Angeles and Orange County areas. 10 years experience with great negotiating skills. To sell a business or buy a business in the LA or Orange County Areas phone Jack and his team at 562-787-4989 Cell / Text. |
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Ralph Santos, Business Broker Specialist: Home Health, Hospice, Health Care Using my MBA and my perseverance I will make things happen! I provide business brokerage niche services specializing in the hospice and home health care agency industry in the Los Angeles County or Ventura County areas. For either buying or selling assistance please phone or email me today. |
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Peter Siegel MBA, BizBen Founder, ProBuy, ProSell, ProIntermediary Programs Founder Of BizBen.com (since 1994). I am the Lead Advisor for the ProSell, ProBuy, & ProIntermediary Programs. I consult daily with buyers, sellers, and brokers daily about buying and selling California small to mid-sized businesses. Call 925-785-3118. |
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Rick Carlson, Business Broker - Southern California You Will Never Feel Lost In The Shuffle. Many Brokers Simply Send Out An NDA And That's The End Of Communication. All Buyers Receive A Personal Meeting With An Ace Acquisition Specialist So They Can Recommend The Perfect Business For You. Phone Rick direct at 800-985-4939. |
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