Everything You Should Know About a Deposit

Yesterday, I got a call from a friend acquiring a small SMB (not represented by an M&A lawyer).

He had put down a deposit, and now he wants to walk (inaccurate financials and gross non-compliance with licensing) but wants his deposit back.

There is a lot of misinformation about deposits (mostly from people who want buyer’s to put down deposits), so here is an explainer on deposits you can save and reference next time you're asked for a deposit:

Deposits generally only exist sub-$10m purchase price and are most prevalent sub-$5m. Even then, only about 50% of the time. Above $10m there are sometimes break fees and reverse termination fees (in distressed scenarios, sometimes the seller pays a cost-reimbursement).

Maybe someone will correct me, but my understanding is deposits are a real estate concept that migrated into M&A.

Sellers will want a deposit to ensure that buyer doesn’t lock them into exclusivity without any impact on buyer for backing out.

Putting down a deposit will make buyer’s offer much more enticing in a competitive process.

If you are considering putting down a deposit, here are some tips:

1. Make it clear to seller that you are expending a lot of capital in reliance on the exclusivity. Tens of thousands are paid on legal, QoE, and diligence. Thus, if buyer backs out, it is at great cost to buyer (even without a deposit).

2. Make sure you and your lawyer understand VERY explicitly when the deposit is, and is not refundable. I often schedule a call to gameplay specific scenarios that can arise.

As buyer’s counsel I want the deposit to be refundable in all circumstances. Seller wants it to be completely nonrefundable.

Usually, it is refundable for any reason during a due diligence period.

Thereafter, there is a middle ground where it is refundable for certain instances, like bank financing falling through.

The principle is the deposit should be refundable for all issues that arise related to (i) diligence, (ii) seller’s actions, and (iii) third parties (outside of buyer’s control).

3. Try to put the deposit down after the purchase agreement is signed rather than after the LOI is signed. Buyer will have much more clarity on due diligence before a purchase agreement is signed.

4. Deposit should be credited toward the purchase price. The purchase agreement should state this.

5. Deposits can take many forms. Buyer should push for the deposit to be as much in buyer’s control as possible (e.g., a copy of a check (cashed at closing), held by a neutral third party)

Final point: deposits can take any form that is negotiated with the seller. Feel free to craft something creative that achieves both buyer and seller’s goals, but make sure you know when and how it is refundable to you.