Due diligence length and earnest money
March 05, 2025
by a searcher from Brigham Young University in Dallas, TX, USA
I recently submitted an LOI on a business with about $500k SDE (I’ve since thought better of it) and the broker was adamant on limiting due diligence to three weeks and for me to put 1% into escrow as earnest money. I was wondering if this was standard practice in deals this size? I wasn't confident I could get due diligence done in three weeks or if the earnest money requirement was standard practice. Thanks all.
from Western Illinois University in Atlanta, GA, USA
from Pepperdine University in Portland, OR, USA
1. Even for a simple / small business 3 weeks is possible, but it's on the short side. And when does the clock start to tick? Usually it's from the time the LOI is executed, but what if you provide your questions and doc list the day of si9ning and it takes the business owner or broker two weeks to produce everything? Or they provide problematic documentation and you have to seek follow-up info that they are not able to produce quickly? I'd do 30 days minimum and possibly 45 days. Also, from a practical standpoint if you are under a non-binding LOI then technically you can continue doing due diligence all the way up to the time you sign binding legal documents - if they aren't responsive / don't produce you can back out.
2. Earnest Money is problematic. There's no binding legal document to tie it to. Usually you've not really agreed to anything other than exclusivity, confidentiality, and your intent to consider buying the business. The purpose of DD is to determine if you truly want to move forward and at what price and terms. How can you have Earnest Money on a non-binding LOI? If you learn that info was misrepresented either by omission of information or due to errors, your price and terms (and even willingness to complete the deal) may be altered. Or you might learn something else during DD that alters your interest. So, unless you have first done pretty robust DD and have entered into a binding purchase agreement I would not agree to earnest money - it just doesn't make sense.