Deposit When Buying a Business: Everything You Need to Know
A deposit when buying a business is not always required, but it can be beneficial for both the buyer and the seller.3 min read updated on January 01, 2024
Updated November 23, 2020:
A deposit when buying a business is not always required, but it can be beneficial for both the buyer and the seller. For the seller, a deposit can show that the buyer is serious about purchasing the business, and the buyer receives a certain amount of security because the deposit incentivizes the seller to complete the transaction.
Deposits and Buying a Business
If there is a business that you have an interest in purchasing, putting down a deposit can show the owner of the business that you have serious intentions to complete the purchase. When putting down a deposit, your money should go into escrow, which will provide protection for all parties involved. If the sale falls through, whether or not your deposit is refunded to you depends on the terms of the contract and your motivation for backing out of the sale.
The escrow holder is a third party who handles the deposit. Typically, the seller will receive the deposit after the buyer has made payment in full and receives the title to the business.
The role of an escrow holder or escrow company is to make sure that both the buyer and the seller fulfill the terms of the contract. The escrow holder will likely charge fees for their services, and your sales contract should describe which party will pay these fees. Canceling the contract will also likely result in an escrow fee if the cancellation causes early termination of the escrow holder's services.
Canceling the Purchase of a Business
The ability to cancel the sale of a business will depend on how you have written the sales contract. For instance, your contract may include several conditions that restrict when and how a party can cancel the contract. Even if your contract doesn't include any conditions, you may find yourself in default if you agree to buy a business and then withdraw from the deal.
Many buyers request a condition that the contract is only executed if the buyer can secure a loan or sell their current business. If these conditions are not met, the buyer might be able to cancel the agreement, although he or she might owe a cancellation fee.
A sales contract also may require that the buyer meet certain conditions before the contract is completed. For instance, the seller might request that the buyer purchase a new roof before closing of the sale. If the buyer does not meet these conditions, it would constitute a breach of contract, allowing the seller to terminate the agreement without any consequences.
You might also want to include a liquidated damages provision in your contract. With this provision, either the buyer or the seller can recover expenses if the other party does not follow through with the transaction. If you include this provision in your contract, be sure to follow the rules in your state.
In California, for example, you cannot use liquidated damages to punish the other party, and the amount that you recover must be reasonable. Most business purchase agreements will provide the buyer a set period of time to do their due diligence. If the buyer discovers information that the seller did not reveal or misrepresented, the buyer should have the ability to cancel the sale.
If you want to purchase a small business, there are a few steps that you should take and issues that you should watch out for:
- Hire an Accountant and a Business Lawyer: Before you purchase a business, you should hire an accountant to review the financials of the business and have the paperwork related to the sale drafted by an experienced attorney.
- Purchase Assets: In some circumstances, you should make sure that you're purchasing the assets of the business and not the business itself. Purchasing the assets instead of the business will both lower your tax burden and protect you from the remaining liabilities of the business.
- Research Payroll and Sales Taxes: Don't agree to a sale until you learn about the business's outstanding taxes. In some circumstances, you can be responsible for the remaining payroll and sales taxes of the business, even if you are only purchasing its assets.
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