Buying a business is an exciting and challenging time. There are many things to consider when you are evaluating the business and deciding whether or not it is right for you. Once you have done your due diligence on the business and have made the decision that you want to go ahead, you may be wondering what happens with the deposit. This article explores the law on deposits and issues to watch out for.
How Much Do I Have to Pay as a Deposit?
The amount that the seller can require you to pay as a deposit for your purchase of the business is usually 10% of the total purchase price. There are no specific laws that regulate how much deposit is required to be paid, but this is the industry standard. A deposit is designed to demonstrate the willingness of the purchaser to proceed with the purchase of the business. It is not meant to be an amount that exceeds what is reasonable to account for any damage that may be caused to the vendor if the purchaser pulls out of the sale. A vendor can require less than a 10% deposit, but 10% is usually regarded as the upper limit.
When is the Deposit Paid?
The deposit is paid when the contracts of sale are signed. If the seller has a legal representative or a business broker assisting them, it is common for the deposit to be held in their trust account. The seller, or their agent, should provide a receipt in writing for the deposit. If the deposit is not paid on time, as agreed in the contract, the seller has the right to terminate the contract.
Issues to Consider as a Business Purchaser
With any heads of agreement, letter of offer, intent to purchase or contract of sale you sign, it is important to make sure that it is clear the deposit is refundable up to a certain point in the purchase process. It may be that settlement will be conditional on particular factors, such as the lease being transferred, and if this doesn’t take place the contract is rescinded and the deposit is returned.
As a purchaser, you want to make sure it is very clearly set out in the contract when the deposit will be refunded. Sometimes the vendor may set out that only a partial deposit will be refunded once the transaction has reached a certain point. This will depend on the expenses the vendor has had to fork out to at that point in time.
For example, if the business is operating at a premises and the vendor has a lease in place, the vendor will need to obtain the landlord’s approval to transfer the lease to you, as the incoming purchaser. Often the landlord will require the vendor to pay the costs of any transfer documentation. The vendor may then seek to retain these costs if the transaction falls through before settlement.
It is important to consider what your contract of sale states in regards to deposits to make sure the vendor is not putting an unfair obligation on you in regards to forfeiting the deposit.
A specialist business sale lawyer will be able to advise you of your obligations and can recommend amendments to be paid to any unfair provisions relating to deposits to ensure that you are fully protected throughout your purchase of the business. If you have any further questions, call LegalVision on 1300 544 755