5% of what since you can't have made an offer yet. Also, what are the terms of the Escrow? You shouldn't be putting anything at risk at this stage. Sounds like an inexperienced seller that's all.

Next!

Move on.

Complete waste of time, bail

Yes. NDA should be enough

An NDA is more than enough

Red flag. Asking for an engagement ring before a first date.

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.

I agree with ^[redacted]‌. Assuming you received detailed enough financials and information to develop an informed LOI, an earnest money deposit, in conjunction with an LOI, that is refundable during DD if buyer decides to walk for any reason or no reason, isn't a red flag, it is somewhat customary. Particularly if "full financials" are extremely detailed and provide insight into proprietary information.

^[redacted]‌, thanks. I almost put 'it may be different in the US' as I'm in Canada.

I would say a 'good faith deposit' is typical in real estate transactions as well as large contested public transactions, but very rare In the lower middle market, If a transaction has many suitors, a good faith deposit could be a way to sort the committed from the uncommitted, but I would agree with Ron that a deposit is typically delivered along with the LOI. I have never seen diligence dependent upon it. I have however seen a non-refundable deposit needed to extend a no-shop period as a way to make sure that the buyer is committed to moving a transaction forward.

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.

Offer to provide proof of financial capacity (bank/investment account statements, investor commitment letters, etc.). It's not necessarily a bad company, but setting up an escrow just to see the data room is a waste of your time. The odds that this ends up being the deal for you are just way too low to jump through those kind of hoops. I'm guessing this is a proprietary deal (can't imagine an experienced intermediary endorsing this request), which means you're going to have to educate the seller on how the process works.

I'm curious about why the seller is asking: is it to prove financial capacity (Nate points out better ways to deal with that), gain a level of psychological commitment (once you've put money in escrow are you more emotionally involved), or are they trying to pull a fast one (terms would need to give you all the ability to walk away with your money - no question your lawyer should be involved)?

Plenty of deals out there. Don't let them knock you off your principles.

Yes, move on

I agree with Rick and don't think it's as clear cut as most responses here. For most small business owners, the only other thing of real value they've sold in their life is a home. Buyers often put a deposit in escrow when buying a home so this seems like a reasonable request to the seller. The seller is most likely completely out of their comfort zone and trying to find ways to vet potential buyers, especially if there is no intermediary involved. You should try to educate the seller but if you're bullish on this deal then you may want to consider the deposit as long as it's refundable. Have your lawyer write up the contract in a way that gives you a complete refund if you find anything that you don't like in DD. Also, the deposit should not be before the LOI is signed and you have exclusivity. Also, negotiate down from 5%. They are most likely just looking for you to prove you're serious which you should be able to do with $5k-10k.

I think I'm w/ Ron & Rick but would need more information. If the funds are held in escrow by a licensed attorney then you don't have all that much to be concerned about. if you are serious about purchasing the business and have done basic due diligence, I would let this request be the stumbling block. Instead, I'd look at it as a way to demonstrate intent with regards to purchase. Good luck!