Deposit with LOI?

November 29, 2017

by a searcher from Harvard University - Harvard Business School

I am dealing with a broker who is pushing for a large deposit (5-10%) to accompany an LOI. This seems unusual to me--in other potential deals I have submitted LOIs with no deposit and then had a 30-day exclusivity period to start working on the major due diligence and start drafting a P&S.

I would love to hear thoughts from others on whether asking for a deposit to accompany an LOI is customary.

Many thanks.

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Reply by a searcher
from University of Pennsylvania in Chicago, IL, USA

I have seen this once - we were asked to put up 100k as part of an agreed LOI. Seller didn't want to grant exclusivity without it. What was worse, he wanted to keep the 100k if the deal fell through. That was totally unacceptable to us. We said no, and proceeded into DD without exclusivity. We learned enough without expending too much on service providers to understand that we didn't like the company. We had deep reservations too regarding the seller's character. Reminded me of a scam I had read about in real estate transactions where sellers try to collect earnest money by trying to get unqualified buyers to agree to provisions that they cannot satisfy. Ridiculous. I think it is fair for sellers to request source/proof of funds and it is fair if someone only wants to work with cash buyers, but requiring a big chunk of money just to start DD is too much.

Reply by a professional
from University of Southern California in North Palm Beach, FL, USA

I and my buyer-clients call that kind of nonsense: "Pay to Peek."

Don’t pay to peek.

Never make an earnest money deposit or sign a purchase contract—no matter how many contingencies are in it—before you and your advisors have analyzed the company, obtained an expert opinion of value and defined alternative terms of purchase.

If you doubt the wisdom of this advice, make an offer on a business you don’t really care about. Later, when you think you know what it is worth, try explaining to the seller why your offer must change.

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