Is it normal for a broker to request a deposit prior to conducting a due diligence?

[jw6403]

Hello. I was wondering if this is simply standard practice of business brokers as I've never used one before. The brokerage firm that brokered a deal between a seller & myself is requesting them I send them a certified check for $5000 prior to conducting my due diligence. The broker said it's simply a good faith deposit that will be refunded once I complete the due diligence whether I commit to the purchase or not. However, I found it odd given it's a non-binding agreement so I thought the deposit had no bearing since I not committing to anything. I mean what would be the reason they keep it other than if I not show up? Do all brokers do this or just a select few? Thank you for any feedback that you can provide.

[MyITGuy]

Hello. I was wondering if this is simply standard practice of business brokers as I've never used one before. The brokerage firm that brokered a deal between a seller & myself is requesting them I send them a certified check for $5000 prior to conducting my due diligence. The broker said it's simply a good faith deposit that will be refunded once I complete the due diligence whether I commit to the purchase or not. However, I found it odd given it's a non-binding agreement so I thought the deposit had no bearing since I not committing to anything. I mean what would be the reason they keep it other than if I not show up? Do all brokers do this or just a select few? Thank you for any feedback that you can provide.

Wouldn't recommend it...if needed I would recommend working with an escrow company:
Good Faith Deposit / Beware of Broker Trust Accounts | LA and OC Business Broker (http://www.sellbusinessbroker.com/good-faith-deposit/)

[Harold Mansfield]

Nope. I wouldn't do it. Brokers get paid commission when the deal is done, not simply for showing up. Sounds like a scam to me, that they'll come up with some reason to keep your deposit or just take off with it.

By the way, what industry is this? What kind of transactions is this person a broker of?

[Fulcrum]

If, in fact, the agreement you have currently agreed upon is truly non-binding, then I agree with both Harold and MyITGuy and second the suggestion of an escrow company if pushed hard. I wouldn't go so far as to call this a scam, but I think the broker is trying to force you to get some "skin" in the game to protect some of the commission.

If, on the other hand, the agreement is a formal purchase agreement, than you will be required to put some hard cash up as a deposit. I would still try to use the escrow company, but some brokers will balk at that.

[Harold Mansfield]

I wouldn't go so far as to call this a scam,

Ha. Yeah, sometimes I get ahead of myself. It would be helpful to know what industry this is. There are a million different kinds of brokers, it could be that this is SOP for whatever industry you are dealing with.

It's the payment with no agreement or contract that sounds suspect. Usually when someone is asking for money, the terms are spelled out. I wouldn't just turn over cash without nothing in writing. And why a certified check? To me that says they are cashing it as soon as they get their hands on it...which doesn't sound like it's just a "hold".

Escrow does sound like a legitimate plan in this situation.

[Freelancier]

I found it odd given it's a non-binding agreement

The agreement may be non-binding to close, but there will be language in there concerning deposits and escrowing deposit money for the transaction. Look to that to see if you're protected and how fast they have to return the money if the deal fails or how the money is applied if the deal succeeds. Basically, this is more of a contracts question, one that I wouldn't leave to the broker to interpret for you.

[Fulcrum]

Ha. Yeah, sometimes I get ahead of myself. It would be helpful to know what industry this is. There are a million different kinds of brokers, it could be that this is SOP for whatever industry you are dealing with.

It's the payment with no agreement or contract that sounds suspect. Usually when someone is asking for money, the terms are spelled out. I wouldn't just turn over cash without nothing in writing. And why a certified check? To me that says they are cashing it as soon as they get their hands on it...which doesn't sound like it's just a "hold".

Escrow does sound like a legitimate plan in this situation.

I'm basing my comments on what my understanding of the term "broker". Anyone who understands the broker's role in a real estate or business sale can skip over the first paragraph.

In regards to real estate and business sales, unlike stocks, brokers represent either the seller or the buyer and often both when dealing with business sales. All brokers make their living purely off commissions and they can only collect when there is, not only a sale, but also a closing. In the case of business brokers, they see an extremely high amount of "tire kickers" and time wasters.

In the case outlined by the OP, I think that the broker is trying to force the deal and make the contract "firm" before the OP is ready. As Freelancier pointed out - this is a contract question. I would highly recommend that the OP have a lawyer review both the proposed purchase agreement as well as the terms and conditions attached to the deposit. As for the cheque being certified, if I were either the seller or the broker, I would require this as well if the money was not being transferred directly.

[Barcode Parade]

It's a scam.

[Fulcrum]

It's a scam.

I have to disagree with this statement. There has not been enough information shared with us to say one way or the other. I still think that this broker is worried about the deal falling apart and is trying to force the OP to firm up the deal before he is ready.

On a side note, I've recently discovered that it is starting to become an industry standard to ask for a signed "Offer to Purchase" before releasing any information about a business that may be listed.

[Barcode Parade]

I have to disagree with this statement. There has not been enough information shared with us to say one way or the other. I still think that this broker is worried about the deal falling apart and is trying to force the OP to firm up the deal before he is ready.

On a side note, I've recently discovered that it is starting to become an industry standard to ask for a signed "Offer to Purchase" before releasing any information about a business that may be listed.

If that was the case, they could simply ask for an Irrevocable Master Fee Protection Agreement.

[Roscoe00]

I assume this is a letter of intent agreement and not yet a purchase agreement. Actually quite a few brokers do this but that doesn't mean they get away with it. First of all any deposit is negotiable. So if you had to do the deal the amount could be as low as $500. Reminds me of a car dealer who tried to scam me for $1000. However, most reputable brokers who are reasonably deal smart know this won't fly. Sometimes deposits are asked for on binding LOIs which makes slightly more sense but I would never sign a binding LOI. And I would never put a deposit down on a LOI period. The broker would have you believe you are taking the deal off the market or tieing up the seller in some way but that doesn't fly either. The fact is you are going out of pocket on time spent, deal costs, due diligence and opportunity costs against other deals. So if I want to play that game I just say fine, seller has to post the same amount in case he's wasting my time. Of course it never comes to that.

The more pertinent question is whether the broker will proceed to ask for a deposit on the purchase agreement, which is more common. I don't do that either although I have been asked to deposit anywhere up to $100,000 on occasion. These days companies have a difficult enough time selling and buyers buying that people realize they don't need all the obstacles. A big deposit on a contract is easily a deal killer and so brokers aren't as tough as they once were. And I have a basketful of reasons to throw at them as to why it doesn't make sense.