Is earnest money or a breakup fee required when selling or buying a small business? The answer to this question may surprise you depending on who you are. If you talk to a business seller or a business buyer, they may answer you the same, however as you dig in a little more into their answer you will see a glaring difference in the answer. A business seller will have a very different perspective from the business buyer.
Sometimes these terms are used interchangeably; however, there is actually a significant difference between an earnest money deposit and a breakup fee, and a good understanding of both and why they are used will help answer the question posed in the title of this article.
First, let us define these terms.
Is a deposit made to a seller showing the buyer’s good faith in a transaction. Earnest money is typically held jointly by the seller and buyer in a trust or escrow account, and has its origins in the real estate world. An earnest money deposit shows the seller that a buyer is serious about purchasing the business. When the transaction is finalized, the funds are put toward the buyer’s down payment. If the deal falls through, the buyer may not be able to reclaim the deposit. Typically, if the seller terminates the deal, the earnest money will be returned to the buyer. When the buyer is responsible for retracting the offer, the seller will usually be awarded the money.* [Read more…]