Key Takeaways

  • A deposit demonstrates the buyer’s serious intent and commitment in a business purchase.
  • Most deposits are held in escrow and governed by the terms outlined in a business sale deposit contract.
  • Typical deposit amounts range from 5–10% of the total purchase price.
  • Whether a deposit is refundable depends on the contract’s contingencies, such as financing or due diligence clauses.
  • Improper handling of deposits or vague contract terms can lead to legal disputes.
  • Both buyer and seller should seek legal advice when drafting or reviewing business sale agreements.

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.

What Is a Business Sale Deposit Contract?

A business sale deposit contract is a legally binding agreement that outlines the terms under which a deposit is made by a buyer during the purchase of a business. It details the deposit amount, the conditions under which it is refundable or forfeited, and how it will be held—typically in escrow.

Key elements of a business sale deposit contract include:

  • Parties involved: Identifies the buyer, seller, and escrow holder.
  • Deposit amount: Typically ranges between 5% and 10% of the purchase price.
  • Escrow terms: Specifies how the deposit is held and released.
  • Contingencies: Such as financing, due diligence, landlord approval, or inventory verification.
  • Refund conditions: Outlines situations where the buyer can reclaim the deposit (e.g., unmet contingencies).
  • Forfeiture clauses: Describes what happens if the buyer defaults without valid cause.

A well-drafted contract minimizes misunderstandings and protects both parties during the transaction.

How Much Should You Deposit When Buying a Business?

The appropriate deposit amount can vary based on the size and type of business, but standard practice is to place a deposit between 5% to 10% of the agreed purchase price. For instance, if you’re buying a business for $300,000, you may be expected to deposit $15,000–$30,000.

Several factors influence the deposit size:

  • Market conditions: A seller’s market may command higher deposits to show strong buyer commitment.
  • Complexity of sale: Larger, multi-asset businesses often require higher deposits.
  • Risk profile: A high-risk or distressed business may require a smaller deposit or more lenient refund terms.

The deposit should be large enough to show sincerity but not so large that it places undue risk on the buyer. Discuss the deposit strategy with your broker or attorney to align with industry norms.

Best Practices for Handling Business Purchase Deposits

To avoid legal and financial complications, follow these best practices when making or receiving a business sale deposit:

  1. Always use a third-party escrow holder. Never make a deposit directly to the seller without a neutral escrow agent.
  2. Ensure all terms are written. A written business sale deposit contract reduces the risk of miscommunication and protects both sides.
  3. Specify refund conditions. Clearly outline when and how a buyer can get the deposit back (e.g., if financing falls through).
  4. Account for due diligence periods. Allow adequate time for reviewing the business’s financial, legal, and operational health.
  5. Use attorney-reviewed contracts. Always consult a lawyer to ensure the contract is enforceable and protects your interests.
  6. Avoid vague language. Ambiguities can result in costly legal disputes, especially over what constitutes "good cause" for cancellation.

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.

When Is a Business Deposit Refundable or Forfeited?

The refundability of a business deposit depends entirely on the wording of the business sale deposit contract and any contingencies it includes. Here are common scenarios:

  • Refundable Deposits
    • If the buyer cannot obtain financing (and it was a contingency).
    • If due diligence uncovers material misrepresentations or liabilities.
    • If regulatory or licensing approvals fail.
    • If the landlord does not approve a lease transfer or new lease.
  • Forfeited Deposits
    • If the buyer backs out without a valid contractual reason.
    • If the buyer misses deadlines or fails to fulfill agreed-upon conditions.

Deposits may also be partially forfeited if cancellation occurs late in the process and the seller has incurred costs (e.g., holding the business off-market or missed opportunities).

To prevent disputes, include detailed language specifying what qualifies as a valid reason to terminate and who determines whether the conditions have been met.

What Happens if a Buyer Backs Out?

If a buyer backs out of a business purchase, the consequences depend on whether the withdrawal aligns with the contract terms. If the buyer backs out in accordance with agreed contingencies, the deposit is typically returned. However, if the buyer fails to meet obligations or cancels without valid cause, they may:

  • Lose their deposit to the seller.
  • Be subject to a claim for damages if the seller proves financial harm.
  • Trigger dispute resolution processes like mediation or arbitration if stipulated in the contract.

Including a clause for liquidated damages can help clarify what the seller is entitled to recover, but the amount must be reasonable and not punitive under state laws.

Frequently Asked Questions

1. Is a deposit required to buy a business? Not always, but it’s common. A deposit shows the buyer’s intent and helps secure the deal while due diligence and financing are arranged.

2. How much should I put down as a deposit? Most business sale deposit contracts require 5–10% of the purchase price, but this can vary depending on the deal’s complexity.

3. Who holds the deposit during the sale process? A neutral third-party escrow company or attorney typically holds the deposit until the sale is completed or canceled per the contract.

4. Can I get my deposit back if the sale falls through? It depends on the contract terms. If your cancellation meets contingency conditions, you may be entitled to a full refund.

5. What should be included in a business sale deposit contract? Key elements include deposit amount, refund conditions, contingencies, escrow terms, and consequences of breach or cancellation.

If you need help with a deposit when buying a business, you can post your legal needs on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.