Seller wants 5% in escrow before releasing full financials. Red flag?

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31

Reply by a searcher
from University of North Texas in Campbell River, BC, Canada

Kyle, I may be the outlier here but I disagree with most of what's been said here. First, Oliver asked the right question. If you've agreed on a price and a "subject to satisfactory due diligence" at your sole discretion, then some money in escrow is not totally unreasonable so long as you have a rock solid subject to contract and your lawyer's escrow is the place where the money is kept as his/her lawyer is going to respect the escrow process. An NDA is not limiting tire-kickers and people getting financials and using them for other purposes. Additionally, it is not an "absolute" red flag as none of us have the complete story.

1. Is there an offer on the table, subject to DD.
2. Escrow is not a refundable deposit, the funds are under some level of structure/control. Oliver's point is correct on the terms of that escrow which is another way of saying my DD thing.
3. Have you been given the highlight to make a back of the envelope offer is there isn't one on the table?

Finally, the seller is this case thinks they are being clever and filtering our tire-kickers, however, as a ten year VC and now an Angel investor, I can tell you this is particularly short-sighted because this causes term sheets to go out with a high likelihood of not having a transaction go over the finish line particularly since you didn't have enough information to make the offer with a solid chunk of confidence it would actually close.

Right now, I'm trying to close a large round and I totally want ALL the DD out of the way so we can go from signed term sheet to legals without all the DD, thus resulting in some modification or death of the term sheet flung at me prior to the investor(s) having all the facts.

It is never black-n-white and I can tell based on over 20 plus years, the vast majority of sellers:

- Have an inflated view on what the business is worth.
- Have no clue as the the proper process.
- Take selling a business highly personal and aren't keen on you calling their baby ugly.

Good Luck.

Reply by a searcher
from Harvard University

I say run screaming. Sorry to disagree with Ron & Rick, but I wouldn't put a dollar down before I've seen financials. (This might be subject to your, and our, definition of "full financials".) I guess maybe you have some modicum of control if it's in escrow with *your* attorney, but I had one broker demand 10% in escrow (with her) to accept an LOI, and I ran away. I already had full financials, but she wanted 10% just to start moving the deal along. That was a red flag for me. On my eventual deal I put a $10k deposit with the broker as "earnest money" to finalize the LOI. I can't remember the exact terms but I think I would have lost that if I backed out of the deal. I think I also gave bank statements showing proof of funds. I can understand a seller wanting to know you're serious, but when you start talking about real money you need to recognize that once the cash is out of your hands (with any party) there can be considerable legal fees if the other party disputes ending the deal.

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