Deposit with LOI?

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October 31, 2021

by a searcher from Indiana University at Bloomington in Carmel, IN, USA

I have a friend submitting an LOI and here’s a question he asked me:

“The sellers want a deposit with the LOI, and they are saying that the deposit goes "hard" after 30 days without a signed deal. Does this make sense? Is there something that is more 'normal' so we don't lose the deposit?”

Curious what feedback or suggestions come to mind?

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commentor profile
Reply by a searcher
from Tufts University in Jersey City, NJ, USA
We haven't encountered this. On the surface it feels potentially reasonable for an in-demand business (filters for motivated buyers) but the 30 day window feels completely unreasonable. 30 days is a pretty tight window to get confirmatory diligence done even if the seller is snappy at responding to data requests, and expecting a potential sunk cost kick in on a business that isn't fully diligenced yet seems entirely unreasonable. Anything that incentivizes bad-faith behavior (like holding back on providing harmful diligence information until after the deposit converts) is a no-go for us.
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Reply by a professional
from University of Southern California in North Palm Beach, FL, USA
I and my buyer-clients call that kind of nonsense: "Pay to Peek."

Don’t pay to peek.

Never make an earnest money deposit or sign a purchase contract—no matter how many contingencies are in it—before you and your advisors have analyzed the company, obtained an expert opinion of value and defined alternative terms of purchase.

If you doubt the wisdom of this advice, make an offer on a business you don’t really care about. Later, when you think you know what it is worth, try explaining to the seller why your offer must change.
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