Broker asking me to put down deposit prior to diligence - standard?
December 09, 2023
by a searcher from Harvard University - Harvard Business School in Portland, OR, USA
Is this standard? Seems non-standard to me. If you've successfully negotiated out of this, would love to learn how.
from The University of Texas at Austin in Austin, TX, USA
I have navigated this. On the call with the seller, I explained how much time and money I plan to spend on financial and legal due diligence. That shows my commitment to the deal. And that this is the beginning of a working relationship. I am paying X thousands of dollars and committing hours of time. If that doesn't show I am genuine, I'm not sure if this is the type of working relationship that I want to start. Each seller has waived the downpayment requirement. It is generally the broker's idea, not the sellers. Remember the seller probably doesn't know the process to sell a business and is doing what the broker recommends. At the end of the day, the broker works for the seller, so I would focus on the seller relationship.
Also, if the broker / seller is asking for too many things in a business sale that are for real estate sales, I would walk away. It's indicative of. "non-standard" behavior to come.
Another option I've tried is agreeing to the escrow and having it held by a 3rd party lawyer, not the broker. And asking that we split the cost of paying the lawyer. Since the deposit is refundable and all I did was change who holds to money and ask the seller to put some skin, a few hundred dollars in the game, they realized a refundable deposit just reduces working capital, it doesn't commit me or them to anything.
from The University of Chicago in Chicago, IL, USA
However, high volume broker shops, especially the ones with a mix of main street and M&A businesses, ask for EMD. to screen buyers.
There is another factor. Many Searchers are signing multiple LOIs and locking up seller under exclusivity. I hear this at conferences and when I teach brokers. Before the recent wave of Searchers, brokers were able to sell businesses to buyers who had their own equity (not requiring multiple investors to make up the equity stack). Even before the Searcher wave, there has been more buyers than seller at the low end. With Searchers in the market a broker has more options. If Searchers think that multiple LOIs is "smart". then I am sure brokers will increase EMD ask. Brokers may even start asking for "proof of equity" not just "proof of bank financing".