What and Why?
An earnest money deposit, otherwise known as an escrow deposit, is an important part of any asset purchase contract. It is essentially the buyer’s initial deposit on the purchase of the business, which is held by a neutral third party, like the closing attorney or escrow company.
The deposit is the buyer’s “skin in the game” to the seller; it gives the seller confidence that the buyer is serious and intends to purchase the business. Once a business is under contract, the seller has a lot of work to do with gathering all of the requested due diligence items, and normally, they aren’t willing to do all that work for a buyer that hasn’t indicated serious interest in moving forward with the purchase of the business. The escrow deposit is a big part of that equation.
In most asset purchase contracts, the earnest money deposit is fully refundable to the buyer, should they cancel the contract within their agreed contingency periods, usually due diligence, lease, or financing contingencies. Each asset purchase contract is different, and buyers will need to refer to their contract for details on contingency periods and deposit specifics.
How Much?
The amount of the deposit is negotiable, but it is normally 10% of the business purchase price. The closing attorney/escrow holder will send verification of the deposit to all parties once it’s received.
When and How?
Once an Asset Purchase Contract has been executed (signed by both buyer and seller), then the earnest money deposit will be due to the escrow holder, which is normally the closing attorney or escrow company conducting the closing. It will need to be sent via bank wire transfer, on the first business day after contract execution.
Buyers will need to contact the escrow holder, in order to receive wire instructions. Normally they are sent via a secure email, but buyers are always encouraged to call the intended recipient before wiring funds, to ensure that the account number is correct.