Handling Deposits in M&A: What Sellers and Buyers Need to Know
- Dr Allen Nazeri DDS MBA
- May 21
- 6 min read
In the world of mergers and acquisitions, handling deposits in M&A is a critical aspect of deal execution that often sparks confusion, especially among first-time buyers and sellers. Should a deposit be required? If so, how much? When is it refundable—or is it ever refundable? And most importantly, what does it signal about the seriousness of the deal?
This article explores how deposits function in M&A, why they matter, and how both buyers and sellers can use them—or their alternatives—strategically to protect their interests.
What Is a Deposit in M&A?
A deposit in M&A refers to an upfront payment—typically made by the buyer—to demonstrate their commitment to a transaction during the exclusivity or due diligence period. This amount is usually held in escrow and applied toward the purchase price at closing.
In smaller or lower-middle-market deals (usually sub-$100M transactions), deposits are far more common. Strategic buyers and private equity groups may resist them unless competitive pressure or seller leverage compels one.
Why Are Deposits Requested?
Sellers request deposits for one main reason: to separate serious buyers from window shoppers.
When a buyer wires a deposit, it signals financial readiness, seriousness, and a willingness to invest time and money into due diligence. From a seller's perspective, this also compensates for the opportunity cost of taking the business off the market during exclusivity.
Here are several common scenarios where deposits are especially valuable:
The seller has multiple offers and wants a mechanism to prioritize the most serious party.
The seller is entering into an exclusivity agreement and needs assurance the buyer will follow through.
The business has operational sensitivity (e.g., employees unaware of the sale), and going through diligence is risky without security.
How Much Should the Deposit Be?
The size of the deposit varies by deal size and type:
Main Street & Lower-Mid Market Deals ($1M–$20M): 2%–10% of the purchase price.
Mid-Market & Upper-Mid Market ($20M–$100M): 1%–3%, often capped at $1–$2M.
PE-backed or Public Deals: Often no deposit, but a break-up fee or reverse termination fee may apply.
Ultimately, the deposit should be large enough to discourage deal fatigue or walkaways—but not so large that it paralyzes the buyer's ability to move forward.
When Is the Deposit Paid?
Most often, deposits are paid upon execution of a Letter of Intent (LOI) and before exclusivity begins. In some cases, the deposit may be delayed until specific milestones, such as:
Completion of financial diligence
Signing of the purchase agreement
Buyer board approval
A phased approach can help balance trust between parties, especially when a full deposit up front feels too aggressive.
Refundable vs. Non-Refundable Deposits
This is one of the most contentious points in handling deposits in M&A.
Refundable Deposits
Typically, a deposit is refundable if the buyer finds material issues during diligence and decides not to proceed. In this case, the LOI should clearly outline conditions under which the buyer may walk away and receive their deposit back—e.g., inaccurate financials, unresolved legal risks, or significant undisclosed liabilities.
Non-Refundable Deposits
Sometimes, especially in highly competitive processes or distressed sales, sellers may push for non-refundable deposits after a certain point in diligence or after defined contingencies are cleared.
Sellers must tread carefully here. If a deposit becomes non-refundable too early, it may scare away legitimate buyers who aren’t ready to take on that level of risk. A good compromise is to make a portion non-refundable upon signing the purchase agreement or clearing major milestones like licensing or financing approval.
Who Holds the Deposit?
Deposits should always be held by a third-party escrow agent or legal counsel, not directly by the seller. This protects both parties and ensures neutrality if disputes arise. Typical holders include:
Transaction attorneys
M&A advisory firms (in small deals)
Escrow service providers
Escrow instructions should clearly specify:
When and how the deposit is released
What happens if the deal is terminated
Remedies for breach or bad faith
Alternatives to Deposits in M&A: Ensuring Commitment Without Cash
While deposits are traditional, they are not the only method to ensure a buyer is serious. In fact, there are well-structured alternatives that give sellers protection without requiring a financial outlay up front—especially valuable when buyers push back on deposits.
1. Shorter Exclusivity with Defined Milestones
Rather than granting a 60- or 90-day exclusivity period, start with a 15- to 30-day window tied to specific buyer deliverables. Exclusivity can automatically terminate if the buyer fails to meet these agreed milestones.
Typical milestones include:
Proof of engagement and payment to a Quality of Earnings (QoE) provider
Engagement of M&A counsel and confirmation of legal representation
Delivery of a first draft of the Purchase Agreement
Confirmation of financing arrangements or board-level approval
This approach turns the LOI into a performance-based agreement, where time is earned, not granted.
2. Staggered Exclusivity Periods
Sellers can offer exclusivity in segments, such as:
15 days for preliminary diligence
15 additional days upon receiving QoE report engagement
30 more days once draft legal docs are exchanged
Each phase must be “unlocked” by hitting key milestones. It keeps both sides accountable.
3. Non-Refundable Process Fee
Instead of a deposit, sellers can require a non-refundable process fee—typically $10K to $25K—to cover diligence and coordination costs. This fee can be credited against the purchase price at closing and serves as a softer version of a deposit while still filtering out unserious buyers.
4. Mutual Performance Clauses
Mutual accountability clauses encourage both sides to keep up momentum. The buyer must submit materials or complete reviews by certain dates, while the seller commits to timely responses and access. This reduces the need for escrowed funds by keeping everyone engaged in good faith.
Strategic Considerations for Buyers
If you're a buyer, offering a deposit—or agreeing to milestone-based exclusivity—can be a powerful way to stand out, especially in competitive auctions.
But never offer a deposit unless you’ve done some preliminary diligence. And if you push back on deposits, be ready to commit to milestone deadlines and documentation, such as:
Proof of funds
Retention letters for advisors
Deal timeline with weekly status calls
Serious sellers will appreciate the structure and will likely choose you over less transparent buyers.
Strategic Considerations for Sellers
For sellers, deposits provide peace of mind—but so do well-structured timelines with teeth. If a buyer resists a deposit, you can still protect yourself through:
Short, renewable exclusivity
Written proof of retained professionals
Pre-agreed diligence timelines
Partial or full loss of exclusivity upon buyer default
This avoids unnecessary stalling and preserves deal momentum without alienating high-potential acquirers.
Final Thoughts on Handling Deposits in M&A
Whether you use deposits or milestone-based exclusivity, the goal is the same: ensure that both parties are aligned, committed, and moving forward with intent.
Handling deposits in M&A should never be an afterthought—it’s a tool to drive accountability and reduce deal risk. With careful planning, the right structure can pave the way for a faster, cleaner close, whether there’s cash on the table or just a well-drafted timeline.
Need Help Structuring Your Next M&A Deal?
Whether you’re a buyer looking to build trust without overcommitting capital, or a seller trying to vet offers without wasting time, we can help you tailor the right framework.
Contact us at PRIME exits
Sample LOI templates
Escrow deposit best practices
Milestone-based exclusivity frameworks
Dr. Allen Nazeri, aka "Dr. Allen," boasts over 30 years of global experience as a healthcare entrepreneur. He is the Managing Director at American Healthcare Capital and Managing Partner at PRIME exits. Dr. Allen provides strategic growth consulting to leadership teams of both privately held and publicly listed companies, ensuring their preparedness for successful exits.
He holds a Dental Degree from Creighton University and an MBA in M&A and Investment Banking from the University of Bedfordshire. Dr. Allen is the author of "Value Engineering: Strategies to 10X the Value of Your Clinic and Dominate the Market!" and the brand new book "Selling Your Healthcare Company at a Premium". Dr. Allen offers a free valuation to business owners ready for a partial or complete exit strategy. Dr. Allen collaborates with strategic buyers, private equity firms, and institutional investors, taking direct accountability for the annual successful sell-side representation of nearly $750M in enterprise value.
To have a confidential discussion about your company and receive a free valuation, please email Allen@ahcteam.com or Allen@ahcpexits.com
You can now communicate with Dr. Allen's clone https://www.delphi.ai/drallen