Question: I am buying a business. In the letter of intent (LOI), the seller and I have agreed on a due diligence date with an escrow deposit. To what extent is my escrow at risk, and where does the asset purchase agreement fit in?
Answer: There are a couple of considerations, depending on whether the escrow deposit is refunded or forfeited.
A period of time is allowed in the LOI for completion of due diligence by the buyer, typically three to four weeks. When the deadline for completion of due diligence is reached, it is the buyer’s responsibility to notify the broker or seller that the requirements have been met. The deal then proceeds to the completion of the asset purchase agreement.
The completed asset purchase agreement between seller and buyer is typically not contingent on the due diligence process. If the due diligence period ends without the seller and buyer’s attorneys being able to agree on the asset purchase agreement, the escrow deposit should be refunded to the buyer and the deal considered cancelled.
If the buyer’s requirements for due diligence have not been met and the buyer chooses to back out of the deal, it’s up to the buyer to contact either the broker or seller prior to the due diligence deadline. The escrow deposit would then become refundable.
However, if the buyer decides to cancel the transaction after the due diligence deadline is over (due to a change of mind or not having completed the due diligence in a timely manner), then – according to the provisions of the signed LOI – the buyer would lose the escrow deposit to the seller.