How Much Deposit to Put Down on a Business Purchase in Saskatchewan

When you make an offer on a business, the seller will usually expect a deposit as a sign you are serious. The natural questions are how much to put down, who should hold it, and whether you can get it back.

The amount and conditions of a deposit are usually something you and the seller work out in the offer, so it helps to understand the choices before you negotiate. This article explains how deposits generally work and which issues in a Saskatchewan deal can affect the money at closing.

This article covers the law of Saskatchewan.

How much deposit is typical

The amount depends on the price, the risk to the seller of taking the business off the market, and how long you need to complete your checks. A small deal with a quick close may involve a modest deposit, while a larger, slower deal may involve more. Because no fixed percentage applies, you and the seller agree on it and record it in the offer.

• A larger deposit shows commitment and can strengthen your offer.
• A smaller deposit limits what you risk before you finish checking the business.
• The conditions attached to the deposit matter as much as the amount.

Who should hold the money

The deposit is best held in trust by a neutral party, usually a lawyer's trust account, rather than paid directly to the seller. That keeps the money safe while conditions are outstanding. The offer should name who holds it, when it is released, and what happens to any interest.

Be cautious about paying anything before you have seen the paperwork. If the business is a franchise, the franchisor must give a disclosure document at least 14 days before any franchise agreement is signed or any payment is made. A franchisee can also cancel within specified timeframes if disclosure requirements are not met.

When the deposit is refundable

A deposit is safest for you when it is tied to conditions in the offer. If a condition fails, the offer should say the deposit comes back to you. If you simply walk away after conditions are removed, the seller may be entitled to keep it. The wording controls, so read it carefully.

• Financing: your lender approves the loan.
• Due diligence: you are satisfied with financial records, contracts and leases.
• Lien search: registered security interests are cleared or paid out at closing.
• Third-party consents: the landlord or key suppliers agree to the change of owner.
• Tax matters: any needed elections or clearances are in place.

How the deposit is applied at closing

On closing, the deposit is normally credited against the purchase price, and you pay the balance. The final figure is then adjusted for items agreed in the contract. Several can matter in Saskatchewan.

• Liens: in an asset purchase the buyer should require discharges of registrations or payout from the price at closing.
• Price allocation: in an asset purchase the price is allocated to each asset at fair market value, then inventory, with the balance to goodwill.
• GST/HST: an asset purchase can attract GST/HST unless an election applies, and the election is made under Excise Tax Act s. 167.
• PST: Saskatchewan PST is payable on both new and used business assets, and the buyer must remit it if the seller did not collect it.
• Non-resident seller: without a CRA certificate, a buyer of taxable Canadian property may withhold 25% (50% on certain property) of the proceeds. This matters only when the seller is a non-resident.

These items change how much cash is needed on closing day, so plan for them when you decide your deposit and financing.

The GST/HST election has limits. It is unavailable if the seller is a GST/HST registrant and the buyer is not, and it does not apply to a sale of only one or more individual assets. Even where it is made, GST/HST can still apply to certain items, such as taxable leases or licences. For PST, a buyer of assets to start operations in Saskatchewan files the Business Assets Declaration within 30 days of the purchase date, while purchases made after the business has started operating are reported on the Net Tax on Consumption line of the regular PST return.

What to do next

• Decide the most you are willing to put at risk before conditions are satisfied.
• Name a trust holder in the offer and state when the deposit is refundable.
• Make the deposit conditional on your key checks.
• Ask your accountant about GST/HST and PST on the deal.
• Have a lawyer review the offer before you sign or pay.

It also helps to think beyond the deposit. If the business has employees who keep working there after the sale, their service is maintained for notice purposes, and notice is calculated on time with both employers at the same workplace. If you are buying the assets of an unincorporated business, confirm its business name registration and plan for your own. How these points apply depends on your situation, so it is worth confirming them with a lawyer or accountant.

Frequently asked questions