Escrow before starting due diligence

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June 20, 2025

by a searcher from University of California, Los Angeles in Los Angeles, CA, USA

If someone has showed proof of funds and a pre approval letter for a deal, is it common to have to start escrow before any DD documents are shared?
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Reply by a professional
from Harvard University in Atlanta, GA, USA
^redacted‌ No. There is no "standard" for earnest money on deals of any size. You should be very clear on what conditions allow you to get your money back. For instance, consider your QoE finds that the EBITDA is over-stated by 20%, which you try and retrade the deal to bring price in line with EBITDA, Seller won't budge on price, do you get your money back? Or if the SBA bank issues a commitment letter based on taxes but your diligence finds issues not reported in the CIM, do you get your money back? What recourse do you have if the Broker isn't quick to return your money?
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Reply by a searcher
from Stanford University in Healdsburg, CA 95448, USA
I wouldn't say it's common. If funding escrow is a condition of access to diligence materials, I'd push back hard on that - but so long as you have a decent escrow agreement that allows you to draw the funds back for reasonable reasons its more of a business judgment thing. Having escrow funded and ready to go can give you substantial leverage in negotiating towards close, so theres a rationale for doing it.
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