Exclusivity, and whether there's a deposit

The short version

• Exclusivity means the seller agrees to stop talking to other buyers for a set period after you sign the letter of intent.
• You need it because you are about to spend real money on attorneys, accountants and lender fees.
• Ask for enough time to finish due diligence and get loan approval, with a way to extend it.
• Some sellers ask for a deposit. Know exactly when it is refundable.
• Use the exclusivity period well. Time runs out faster than buyers expect.

Why you want exclusivity

After you sign a letter of intent, you will pay for due diligence, a quality of earnings review if needed, legal work and lender costs. Without exclusivity, the seller could sell to someone else while you are spending.

How long

Long enough to finish due diligence and get your loan approved, and realistic for your lender's timeline. Ask your lender how long their process takes, and build in a little room. Include a way to extend by written agreement if the lender needs more time.

What sellers want in return

A seller who agrees to exclusivity takes the business off the market. They want to know you will move quickly and close. They may ask for:

• Milestones, such as a lender commitment by a certain date.
• A deposit, sometimes called earnest money.

Deposits

Many small business sales have no deposit. When there is one, ask:

• How much? Keep it modest.
• Where is it held? With a neutral escrow agent, not the seller.
• When is it refundable? It should come back to you if due diligence finds problems, if the loan is not approved or if the seller backs out.
• When is it not? Usually only if you walk away for no reason covered by the letter of intent.
• Does it apply to the price at closing?

Use the time

Start due diligence immediately. Send requests in the first week. Keep your lender updated. Most exclusivity periods feel generous at the start and short at the end.