Business acquisitions: what to do if your seller demands a deposit

Kirsty Davey, Partner and Head of Corporate and Commercial at Coodes Solicitors, outlines the steps you should take if you are acquiring a business and the seller asks for a deposit.

When we advise clients buying or selling businesses, the issue of whether or not there should be a deposit attached to the sale sometimes comes up. In fact, it is quite unusual to have a deposit on a business deal. Deposits are more associated with property sales. So, if you are acquiring a business and the seller has asked for a deposit, it is worth investigating why this is the case. Before agreeing to a deposit, there are a number of steps you should take to avoid unnecessary risk.

1. Ask the seller why they need a deposit

Because deposits are not the norm for business deals, it is a good idea to establish why your seller has requested a deposit. There are circumstances in which it would be more common. For example, if you are entering into a conditional contract, because of an outstanding issue with the business, a deposit may be required to demonstrate commitment and provide comfort to the seller that they should go ahead and resolve the issue with a view to a sale. Once you know the reason for the request, you and your lawyer can discuss whether or not you feel it’s fair and reasonable.

2. Challenge the amount of the deposit if it is unreasonable

Because they are unusual in these transactions, there is no standard percentage figure for a deposit in a business sale. You will therefore need to consider whether or not you feel the amount being requested is fair and discuss this with your lawyer. If you decide that the figure is unreasonable, you can then challenge the seller and ask them to review it. It is worth knowing that in the past, businesses have gone to court to successfully challenge requests of deposits of 25 per cent.

3. Carefully review the terms and conditions

Before agreeing to pay a deposit, it is essential that you are comfortable with its terms and conditions. In particular, under what circumstances the seller could keep your deposit? It is very important to instruct an experienced lawyer to review these terms and conditions so that you do not find yourself inadvertently handing over a significant, non-refundable deposit.

4. Ensure the deposit is covered in your heads of terms

You will need to ensure the terms and conditions attached to the deposit are covered in your heads of terms. This is an important document that sets out details of the future agreement between you and the seller. Although heads of terms are not automatically legally binding, a good lawyer will ensure that the deposit arrangements are worded in such a way that they form a legal contract between you and the seller.

5. Instruct an experienced lawyer to handle your business purchase

For this whole process to go smoothly and to ensure you get the best outcome, you need an experienced corporate lawyer to handle your business purchase – whatever the value. They will understand when it is reasonable to challenge your seller’s request. If you do have to pay a deposit, they will know how to remove as much of the risk as possible.

For advice on these issues, please contact Kirsty Davey at Coodes Solicitors on 01326 214034 or kirsty.davey@coodes.co.uk

If you require assistance disputing a previous agreement, please contact Abi Lutey at Coodes Solicitors on 0800 328 3282 or abi.lutey@coodes.co.uk