- A deposit is a sum the buyer pays, usually at signing or shortly after, as a sign of commitment to the deal.
- The key distinction is whether the buyer had a contractual right to walk away (through an unsatisfied closing condition) or whether they're simply in breach.
- A forfeited deposit is rarely the seller's only potential remedy, though it's often the most straightforward one to enforce because it doesn't require going to court to collect money…
You've signed a purchase agreement, the buyer has paid a deposit, and then — days or weeks before closing — they tell you they're not going through with it. Whether it's cold feet, financing that fell through, or something they found in due diligence, a buyer backing out of a business purchase leaves the seller asking one immediate question: what happens to the deposit?
The answer depends almost entirely on what the purchase agreement actually says. Unlike some other areas of contract law, there's no fixed statutory rule dictating deposit treatment in a business sale — it's a matter of what the parties negotiated and put in writing.
This article explains how deposits typically work, what can happen when a buyer walks away, and what other remedies a seller may have beyond the deposit itself.
What a Deposit Is (and Isn't) in a Business Sale
A deposit is a sum the buyer pays, usually at signing or shortly after, as a sign of commitment to the deal. It's typically held in trust — often by a lawyer or, in a brokered deal, by the broker — pending closing. Its exact treatment (refundable, non-refundable, applied to the purchase price at closing) is entirely a matter of what the purchase agreement specifies.
A deposit is a different thing from a holdback or escrow, which is a portion of the purchase price withheld from the seller after closing to secure the buyer's post-closing indemnity claims. A deposit is paid by the buyer before closing; a holdback is money the seller would otherwise receive, held back after closing.
What Happens When a Buyer Walks Away
| Scenario | Typical Outcome |
|---|---|
| The agreement states the deposit is forfeited if the buyer breaches without a valid excuse | The seller generally keeps the deposit, as specified |
| The agreement is silent on what happens to the deposit on default | The parties' rights depend on general contract law principles, and the outcome is far less predictable — this is exactly why silence should be avoided when the agreement is drafted |
| The buyer walks away using a legitimate right under the agreement (e.g., a financing condition or due diligence condition that wasn't satisfied) | The deposit is typically returned, since the buyer isn't in breach — they're exercising a right the contract gave them |
| The buyer simply changes their mind with no contractual right to walk away | This is a breach of contract, and the deposit-forfeiture and other remedy provisions in the agreement should govern what happens next |
The key distinction is whether the buyer had a contractual right to walk away (through an unsatisfied closing condition) or whether they're simply in breach. Purchase agreements are typically built around specific conditions — financing, satisfactory due diligence, third-party consents — and a buyer who properly exercises one of those conditions is not the same, legally, as a buyer who just decides not to proceed.
Remedies Beyond the Deposit
A forfeited deposit is rarely the seller's only potential remedy, though it's often the most straightforward one to enforce because it doesn't require going to court to collect money that's already sitting in trust. Depending on the purchase agreement and the circumstances, a seller facing a buyer's breach may also be able to pursue:
- Damages for breach of contract, covering losses beyond the deposit amount — such as costs incurred in reliance on the deal, or the difference if the business is later sold for less to another buyer. A seller pursuing this route generally still has a duty to take reasonable steps to mitigate those losses (for example, by remarketing the business) rather than simply letting losses accumulate.
- Specific performance — a court order requiring the buyer to complete the purchase — is a remedy that exists in principle for contracts involving unique assets, but it's used sparingly, and money damages remain the default outcome sought in most breach-of-contract disputes.
Whether the deposit is treated as the seller's full and final remedy (a "genuine pre-estimate of damages") or merely a partial one that doesn't preclude further claims depends on how the purchase agreement is worded — well-drafted agreements are explicit about this rather than leaving it to be argued over later.
How to Protect Yourself as a Seller Before You Sign
- [ ] Make sure the purchase agreement explicitly states what happens to the deposit if the buyer breaches without a valid contractual excuse
- [ ] Clarify whether the deposit is the seller's sole remedy or whether further damages remain available
- [ ] Define closing conditions (financing, due diligence, consents) precisely, so it's clear whether a buyer walking away is exercising a right or breaching the agreement
- [ ] Set a firm deadline for conditions to be satisfied or waived, rather than leaving them open-ended
- [ ] Have your lawyer review deposit and remedy language before you sign — this is not a section to leave to a template
Frequently asked questions
Is a business sale deposit always non-refundable?
No — whether it's refundable or non-refundable, and under what circumstances, is entirely a matter of what the purchase agreement says. There's no default rule that makes deposits automatically non-refundable in a business sale.
What if the buyer says they're backing out because of what they found in due diligence?
If the purchase agreement includes a due diligence condition in the buyer's favour, walking away because of a genuine dissatisfaction with what they found may be a legitimate exercise of that condition, not a breach — the deposit would typically be returned in that case, subject to the specific wording used.
Can I sue for more than just the deposit if the buyer breaches?
Potentially, yes, depending on how the agreement is drafted and what your actual losses are — but this generally requires pursuing a claim rather than simply keeping money that's already in trust, and you'd typically need to show you took reasonable steps to reduce your losses.
Should the deposit be held by a lawyer rather than the buyer or seller directly?
Having a neutral third party (commonly a lawyer, sometimes a broker) hold the deposit in trust is standard practice and avoids disputes over access to the funds while the deal is pending.
This is a business purchase or sale question
Start a file online — flat, published fees, reviewed by a licensed Ontario lawyer before a dollar is owed.