It is important to protect yourself from forfeiting your deposit when you sign a purchase contract. This would seem to be a very obvious statement. Except, what is not obvious is that so few people know how to do that. The result of inexperience is that too many people lose their purchase deposit. The deposit checks vary from $5,000 to $50,000 or even more.
Every business broker has his own modified purchase contract. Each version has different wording concerning the time frame for financial due diligence, business review and lease assumption. Buyers are verbally told they cannot lose their deposit until the due diligence cut off date has passed. I have found that with some of these creative purchase agreements this is not true when you look into the actual fine print.
Are You Being Rushed to Sign a Purchase Agreement…Take Heed.
I have many points of consideration that I run all such agreements through to ensure my clients best interests are protected, and sadly, only 10% of all the purchase contracts I see pass my test as absolutely protecting the buyer. The other 90% fail from one to seven of my points.
My due diligence clients usually send me the purchase contract before signing it. I discovered quite often the buyers are being rushed to make offers and consequently they would drop having me read the purchase contract first.
Here is my communication to one client who that happened to:
Dear Client: I have quickly read your agreement. This purchase agreement is not the CABB- (California Association of Business Broker) standard form, which is designed with some protection for buyers. CABB members have free access to this contract form. The following are my remarks regarding your contract.
- I cut and pasted this paragraph out of your contract. It is confusing, but I believe it is clear enough to support a lawsuit, if the problem occurs. You want to avoid lawsuits. This offer is subject to the Buyers observation of the business and approval of all books, records, and equipment within 30 days from acceptance of this offer. Observation, book check and escrow shall run concurrently. Upon Lender’s approval of the SBA loan and landlords approval of the lease assignment, all contingencies shall be deemed removed and Buyer’s initial escrow deposit in the amount of $50,000 shall be deemed non-refundable to Buyer. Seller agrees that Buyers non-refundable deposit shall be considered liquidated damages in the event of default by Buyer.
- This means that if your SBA and lease is approved you lose your deposit even if the 30 days is not up.
- It says elsewhere, after 30 days you have automatically approved the books and records.
- Of course the seller will approve this deal. You paid what the broker told you what was required of the seller to buy the business. You did not even try to get a better price.
- Things are not as the brokers tell you they are. Brokers can tend to leave things out that they do not want you to notice.
When clients send me a draft of a purchase contract (offer) to review and suggest changes it takes me 45 minutes to read it and another half hour to write my findings and make my suggestions as to changes. Then the client and I would discuss the changes. Then the client can return to the broker armed for the discussion about the changes they’re requesting.
In order to save the clients’ money and to prevent this problem from happening in the first place, I wrote a report.
The report is called “Thirteen Protections to Be on All Purchase Agreements”.
I have just started giving this report to my existing clients and new clients who are making offers and are qualifed. This report is worth at least $500.00, if only because the clients save that much time and money by not having me read every purchase contract. This is a must read if you are making offers and submitting deposit checks on businesses.
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Image credit: Linda & Colin McKie istock
Request a copy here:
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