When is a deposit required? How much? Under what conditions is it refundable? Get clear answers before you put money at risk.
A good faith payment made by the buyer, typically upon signing the LOI or definitive agreement, to demonstrate serious intent to close. The deposit is held in escrow and credited toward the purchase price at closing. If the buyer walks away without a valid reason, the seller may retain the deposit as liquidated damages.
At LOI Stage
Usually not required. Most M&A LOIs don't require earnest money until the definitive agreement stage. However, sellers sometimes request a deposit with the LOI to ensure buyer seriousness, especially in competitive processes.
At Purchase Agreement Stage
Commonly required. Once you sign the definitive purchase agreement, a deposit of 1-10% of purchase price is standard. This is when "skin in the game" matters most.
When Is Earnest Money Required?
Some sellers or brokers request earnest money with the LOI. This is more common in:
The definitive purchase agreement almost always requires earnest money. At this stage:
Deposit is typically due:
Sample Language:
"Within three (3) business days of execution of this Agreement, Buyer shall deposit $250,000 ('Deposit') into an escrow account with [Escrow Agent]."
Some deals require additional deposits as milestones are met. Critically, the deposit may "go hard" (become non-refundable) after certain dates:
"Initial Deposit of $100,000 shall be refundable during the Due Diligence Period. Upon expiration of the Due Diligence Period, Buyer shall deposit an additional $150,000, and all deposits shall become non-refundable except for Seller default or failure of Closing Conditions."
How Much Earnest Money Is Typical?
| Deal Type | Typical Deposit | Notes |
|---|---|---|
| Small Business (<$1M) | 5-10% | Higher % because absolute dollars are smaller. $50K on $500K deal. |
| Lower Middle Market ($1-10M) | 3-5% | $150K-$500K typical. Often negotiable based on DD period. |
| Middle Market ($10-100M) | 1-3% | $500K-$3M. Professional buyers negotiate hard on deposit terms. |
| Large Cap (>$100M) | 1-2% | May use reverse break fees instead of deposits. R&W insurance common. |
| Commercial Real Estate | 1-3% | Often goes hard after DD period. May increase at financing contingency removal. |
When Is the Deposit Refundable?
When Does the Deposit "Go Hard"?
Signing
Deposit funded
DD Expiration
Deposit goes hard
Closing
Applied to price
Know exactly when your deposit becomes non-refundable. Calendar the date. Complete your due diligence BEFORE that date. Once the deposit goes hard, you lose it if you walk-regardless of what you find later.
Escrow Arrangements
Earnest money should NEVER go directly to the seller. It should always be held by a neutral third-party escrow agent:
Title Company
Common in real estate, handles closing
Escrow Agent
Banks, trust companies, specialized firms
Attorney Trust Account
Seller's or buyer's counsel, with proper terms
LOI Deposit Language
EARNEST MONEY DEPOSIT
1. Initial Deposit. Within three (3) business days of execution of the Purchase Agreement, Buyer shall deposit the sum of $[AMOUNT] (the "Initial Deposit") into an escrow account established with [ESCROW AGENT] (the "Escrow Agent").
2. Additional Deposit. Within three (3) business days following the expiration of the Due Diligence Period, provided Buyer has not terminated pursuant to Section [X], Buyer shall deposit an additional $[AMOUNT] (the "Additional Deposit," and together with the Initial Deposit, the "Deposit").
3. Refundability. The Initial Deposit shall be fully refundable to Buyer if Buyer terminates this Agreement during the Due Diligence Period for any reason. Following expiration of the Due Diligence Period, the Deposit shall be non-refundable except in the event of: (i) Seller's breach of this Agreement; (ii) failure of a Closing Condition; or (iii) termination pursuant to Section [Material Adverse Change].
4. Application at Closing. At Closing, the Deposit shall be credited against the Purchase Price and released to Seller.
5. Forfeiture. If Buyer fails to close the Transaction for any reason other than those specified in Section 3 above, Seller shall be entitled to retain the Deposit as liquidated damages, which the parties agree is a reasonable estimate of the damages that would be suffered by Seller and not a penalty.
Deposit refund conditions are set in your LOI. Our M&A attorneys review the terms to make sure your earnest money is properly protected.
Request LOI Review →Before you put money at risk, make sure your LOI and purchase agreement protect your interests. We review deposit terms to ensure you're not unnecessarily exposed.
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