"We will only entertain an offer if you agree to provide an 'earnest money deposit'," says the broker.

You really like the business but don’t like the idea of risking $10K, $20K, or even $50K out of the gate.

What do you do?

This short, sweet issue is your playbook for handling this scenario. Learn how to keep the deal, protect your money, and do it all with a straight face.

Here are my recommendations on how to deal with a request for a deposit by a business broker. These are provided in order of preference from most preferred to least.

1. Just Say “No”

This isn’t real estate. Brokers pushing for "earnest money" deposits often come from real estate backgrounds. These deposits aren't typical in SMB M&A. They’re more common in real estate, where diligence is fixed and straightforward.

But just saying “no” can kill the deal. Instead, politely decline and offer something in return.

Example: “I’ve spoken with my deal lawyer and banker, and confirmed that most business acquisitions don’t involve a deposit. Can we proceed without one? I can expedite the due diligence process and close as quickly as possible.”

This shows you're serious (you have a lawyer and banker) and addresses a common seller pain point—unnecessary delays.

2. Demonstrate You’re a Serious Buyer

Sometimes, you need to show you're a serious buyer more explicitly. Here’s how:

• Provide a CV/profile showing your experience in business management and the industry.
• Reiterate that you have a deal team ready to move quickly.
• Present a proposed deal timeframe (with help from your deal team).
• Offer proof of funds, such as an accreditation letter or a letter from your banker (avoid filling out a financial statement some brokers ask for).

3. Minimize the Good Faith Deposit

If you must put down money, keep it minimal. The goal is to show you're serious, not to penalize you if you walk away. Aim for $5K-$10K.

You might even explain your reasoning with something like "I understand the seller's need to be satisfied that I'm a serious buyer and not someone who will waste everyone's time. I propose a deposit of $10K to demonstrate that I'm serious here."

4. Agree Only After PA Is Signed (Optional: Ask Seller to Match)

Propose that the deposit be paid only after due diligence is complete and the purchase agreement is signed. This makes sense and shows commitment. You might even suggest a two-way deposit, where both buyer and seller place a deposit in escrow. If either party fails to close without a good reason, the other party gets the entire amount. This equally incentivizes both parties to stay engaged.

5. 100% Refundable During Due Diligence

This is the least favorable option but a viable path. If you need to put down a deposit, ensure there's clear contractual language allowing you to walk away anytime during due diligence with a 100% refund. After due diligence, the deposit can become nonrefundable, but include language stating that if the seller acts in bad faith or refuses to negotiate, you get your deposit back.

Final Tips for Handling Deposits

If you put down a good faith deposit, always:

1. Have your deposit held by a real escrow agent or lawyer in their trust account. Never let the broker hold it (unless they have a true escrow account) or pay it to anyone else. I just about guaranty you will have no recourse and legal ability to get it back if they want to play hardball.
2. Include clear language in the binding portion of the LOI about how the deposit will be handled, held, and refunded. I recommend you have buy-side legal counsel help you draft or review.
3. Have a written escrow agreement signed by whoever is holding your money. Without an agreement you have no legal recourse to get your money back.
4. Ensure your deposit is credited toward your purchase price in the purchase agreement. Otherwise, you may have just wasted your money (even if the deal does close).

I hope this playbook helps next time a broker asks for a deposit on a deal you’re interested in.

Did I miss anything? Got questions or war stories to share? Hit me up at eric@clearfocuslaw.com or on X @lawyer4smbs.

Until the next issue, happy hunting!

- Eric