Today I’m going to tell you something I hate to do, but 100% HAVE done when necessary…
Tell a broker to “F**k off.” (Politely, of course.)
You see, there are requests brokers will make of you as a buyer that are totally legitimate…
And then there are those that are NOT.
Case and point: A goodwill deposit is a payment the broker requests from you as the buyer at some point in the deal process.
In very rare cases, a seller could request it from you (in the event you originated an off-market deal via your network, social media, event or a direct approach).
But 99% of goodwill deposit requests come from business brokers.
Here’s what happens…
You find a deal on a business broker website and request the details, the information memorandum.
The broker might ask for the deposit before releasing any information or allowing you to speak to (or meet) the seller, though this is rare.
The request usually comes once you have negotiated an offer, it’s been accepted and you sign the LOI or letter of intent (also called an MOU or HOT, depending on where you live.)
Regardless, they all mean the same thing. It’s an agreed set of deal points, conditions, next steps and a timeline to closing.
If you are asked for a goodwill deposit, NEVER PAY IT. Politely decline. It almost never goes to the seller— it goes to a broker.
Sometimes it goes into escrow and the broker may say it’s refundable, but good luck getting it back if you decide not to proceed with the deal…
Which, as the buyer, is your RIGHT.
The deal may fall down on due diligence. You may find the revenue has been overstated and expenses understated. Thus, the profits are lower and so is the valuation.
You may find the assets aren’t worth what the seller thinks they are. That means the financing available for the deal will be LESS than what you needed. If the seller will not renegotiate the terms of the deal — say lower closing payment — you can walk away.
There may also be legal issues. Perhaps there’s litigation against the business that can’t be financially forecasted.
Or, you may even find a better deal and decide this one isn’t right for you after all.
If you have paid a goodwill deposit, it’s a sunk cost that actually weakens your negotiating position and makes it harder to pull out.
But don’t confuse the goodwill deposit with the deposit (closing payment) to buy the business—they are separate.
Let’s look at an example…
Revenue $1 million
Profit $200,000 (20% margin)
There are no adjustments for surplus cash, real estate or inherited liabilities.
You agree to a $250K closing payment (from financing the assets and/or cash flows) and $250K seller financing to be paid over five years ($50K per year).
You sign an LOI and the broker asks for a goodwill deposit payment. This could be $10K, though I have seen requests as high as $100K.
Nicely say “NO.”
If asked for a goodwill deposit, reply with this:
I am about to invest time and money and, as such, I want a goodwill deposit from the seller to cover my time and costs if he or she pulls out.
Suggesting a seller’s counter fee usually works as the two will cancel out (though make sure you keep the break-up fee as part of the LOI.)
At this point, you’ll go through due diligence. And let’s say you find that the profit is really $150K and the assets aren’t as high as you were led to believe.
You may want to pay $350K with $150K at closing and the remaining $200K as seller financing over four years.
Another tactic to circumvent the broker’s request for a goodwill deposit is to leverage your relationship with the seller.
If you have gotten them to know, like and trust (KLT) you, shown your credibility, positioned yourself as a “safe pair of hands,” and built high levels of rapport…
Call them and say:
You know I’m a serious, trustworthy, buyer. We have a great relationship. We are the classic willing buyer–willing seller dynamic. We trust each other. Let’s get the deal done. If you don’t trust me to follow through on this deal then we shouldn’t proceed. I’m sure you understand.
I once said that exact thing directly to a seller when his broker asked me for a goodwill deposit (it was a rare occasion where my counter-fee argument didn’t work.)
When the seller found out the broker had asked for the goodwill deposit, he went crazy and almost fired the broker. He wasn’t aware it had been asked.
Again, goodwill deposit requests are driven by brokers.
Challenge with a counter-fee if asked or, worst-case scenario, call the seller.
If none of those things work, it’s a BIG red flag for me. Move onto another deal.
Until next time, bye for now.