Skip to main content

Earnest Money and Deposits

The buyer's good-faith cash, held by a neutral third party and often forfeited as a breakup fee if the buyer walks away by choice.

What Earnest Money Is​

Earnest money, also called a deposit, is cash a buyer puts up to prove they are serious before a deal closes. McDannell, the only one of the three sources to treat it directly, defines it as the buyer's good-faith cash held in escrow. He sizes it modestly relative to the deal:

"Buyer's good-faith cash (~5% of price, or $10-20K) held in escrow; non-refundable as a 'breakup fee' if the buyer walks by choice."

McDannell, Get Acquired, ch. 6

The point of the deposit is commitment. A buyer who has wired real money into escrow has skin in the game, which makes them less likely to abandon the process on a whim or to drag out diligence indefinitely.

How It Is Held: Escrow​

Earnest money does not go to the seller. It sits with a neutral party until both sides confirm closing. McDannell describes escrow as a structure that protects both buyer and seller during the gap between agreement and close:

"Neutral third party (escrow service or lawyer's trust account) holding deposit/funds until both sides confirm closing."

McDannell, Get Acquired, ch. 6

Using an escrow service or a lawyer's trust account keeps the deposit out of either party's direct control, so neither side can simply seize it during a dispute. The escrow terms, including what triggers release of the deposit to the seller and what triggers its return to the buyer, are spelled out in the purchase agreement.

The Deposit as a Breakup Fee​

The deposit's teeth come from being non-refundable when the buyer walks by choice. In McDannell's framing it functions as a breakup fee: if the buyer chooses to abandon a deal they agreed to pursue, the seller keeps the money as compensation for the lost time, lost momentum, and the period the business spent off the market. This is distinct from a buyer walking because a genuine, disclosed problem surfaced in due diligence, where refundability depends on the negotiated terms.

McDannell ties the deposit directly to weighing one offer against another. He argues that the strongest offer is not always the highest number, and lists the deposit as one of the structural signals to evaluate:

"Evaluate offers on structure, cash, financing, deposit, and fit — 'apples to carrots to candy bars.'"

McDannell, Get Acquired, ch. 6

Defending Against Bad-Faith Buyers​

A deposit also serves a protective function against buyers who are not really buyers. McDannell warns that competitors sometimes pose as acquirers to extract confidential information, and he pairs the deposit with confidentiality protection as a defense:

"Competitors may feign interest to harvest P&Ls, LTV, and lead sources; protect with custom NDAs and non-refundable deposits."

McDannell, Get Acquired, ch. 6

A non-refundable deposit raises the cost of fishing for a seller's data, which filters out tire-kickers and intel thieves before they reach sensitive records.

Further Reading​

Sources: McDannell, Get Acquired ch.6