Should I give escrow or earnest money when submitting an LOI?

August 18, 2021

by a searcher from Indiana State University in Chicago, IL, USA

Hi Search Funder family

Does anyone have perspective if you should give escrow or earnest money when you are submitting LOI? I’m getting trader info from companies with criteria around earnest money when submitting LOI. Is this normal?

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Reply by a searcher
from Babson College in Boston, MA, USA

The purpose of all this is to signal that a Buyer has the "means to transact" and is capable of getting a deal done. They can no more waste time on a non-Buyer, than you can on a non-Seller. For funded searchers, your existing documents substantiate this. For a self-funder search a Letter of Support from a Bank (up to 90% of the sources of funds) and perhaps one from an investor(s) supporting you is prudent. In smaller deals, syndicates of investors and searchers become less common so the other side still needs this signal that you have the means to transact. A solid compromise is to place the equity in escrow upon signing a definitive agreement, PRESUMING, you are doing a non-simultaneous sign and close. Otherwise, the fact that your deal team is in touch with the Seller's is a mutual commitment to close, and you should explain that you would not incur these deal costs is you did have the "means to transact".

Reply by a searcher
from Georgetown University in Chicago, IL, USA

Generally agree with the sentiment that earnest money and escrows are not customary when submitting an LOI. As the buyer., you are the one taking risk (spending the majority of the diligence dollars and ultimately making a decision) and doing the heavy lifting (not to discount the involvement of the seller at all). I could understand the desire for some sort of escrow as a show of good faith/proof of funds but earnest money without any sort of clawback or anything like that would be out of market from what I have seen. I don't think there is a problem with it at all. As others have mentioned, good optics for the Seller (which as a searcher is an important relationship to maintain), just be sure you're protected and not giving away money if the deal goes south and you need to walk away for some reason.

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