What it means
Deals take time, and while a buyer runs due diligence the seller is off the market and turning other people away. Good faith money compensates for that risk by giving the buyer something real to lose if they change their mind.
The deposit is usually held in escrow, an account controlled by a solicitor, title agent or broker who releases the funds only when agreed conditions are met. Escrow matters because it keeps the cash out of the seller's hands until completion, so a dispute stays a legal argument rather than becoming a debt collection exercise.
Customary amounts vary by market: 1% to 3% of the price is common in commercial property, while equipment purchases and small business acquisitions often use a negotiated flat sum. The size is itself a signal, so a thin deposit on a contested asset frequently loses to a fatter one at the same headline price.
The contract, not the label, decides whether the money comes back. Contingencies, meaning conditions such as a satisfactory survey, finance approval or clean due diligence, give the buyer defined escape routes, and missing the deadline attached to one usually converts the deposit into the seller's property.
Good faith money, earnest money and a deposit against a letter of intent are close cousins with similar mechanics. Corporate versions tend to be more generous to the buyer, more likely to be refundable, and often sit alongside a break fee rather than replacing it.
In practice
Real-world examples.
Example
A restaurant group signs a letter of intent to acquire a three-site competitor and pays $50,000 of good faith money into a solicitor's client account. The sum buys a 45-day exclusivity window during which the seller cannot talk to other bidders, and it is refundable only if the accounts differ materially from what was represented.
Example
A logistics firm bidding for a fleet of 12 refrigerated trucks at auction posts a $25,000 deposit before the sale to be registered as a bidder. Unsuccessful bidders have their deposits returned within three working days, while the winner sees theirs applied to the invoice.
Example
A software company negotiating a five-year office lease pays one month's rent, $18,000, as good faith money while the landlord runs credit checks and prepares the lease. It converts into the first month's rent on signing, so the tenant is not out of pocket, but it would have been kept if the tenant had abandoned the negotiation.
Formula
Calculation
Good faith deposit = purchase price x agreed deposit percentage
Balance due at completion = purchase price - deposit already paid
A distribution business agrees to buy a warehouse for $1,200,000, with a good faith deposit set at 3% of the price.
Deposit = $1,200,000 x 3% = $36,000
That $36,000 goes into escrow on signing. If the sale completes, it is credited against the price and the buyer transfers the remainder:
Balance at completion = $1,200,000 - $36,000 = $1,164,000
If the buyer's finance is refused inside the 30-day finance contingency, the escrow agent returns the full $36,000. If the buyer simply changes their mind after every contingency has expired, the seller keeps the $36,000 and the buyer has paid $36,000 for an asset they will never own.Case study
Seen in the real world.
Cedar Mill Logistics is an illustrative company used here to show how good faith money behaves when a deal goes wrong. It agreed to buy a cold storage depot for $1,200,000 and lodged $36,000 in escrow, with contingencies for a structural survey and for finance, each with a 30-day deadline.
The survey came back on day 22 with $140,000 of roof repairs. Cedar Mill's director asked for a price reduction, the seller refused, and rather than formally withdrawing under the survey contingency the director let both deadlines pass while continuing to negotiate. When talks collapsed on day 41, the contingencies had expired, and the escrow agent released the $36,000 to the seller.
The fictional outcome turned on paperwork rather than fairness. Cedar Mill had a genuine reason to walk away and a contractual right to do so, but the right existed only inside a window, and the money was lost for missing a date rather than for making a bad judgement.
Watch out
Common mistakes.
- Treating good faith money as a fee paid to the seller. In a completed deal it is part of the purchase price, not an extra cost, so quoting it as an additional expense overstates the true price of the transaction.
- Paying the deposit directly to the seller instead of into escrow. Recovering money from a counterparty who already holds it is far harder than instructing a neutral agent not to release it.
- Letting contingency deadlines lapse while negotiating informally. The contract runs on dates, and a verbal understanding that talks are continuing will not restore a right that has already expired.
Questions
People also ask.
Is good faith money always refundable?
No. It is refundable only in the situations the contract lists, most commonly a failed survey, refused finance or a material discovery in due diligence, and only if the buyer withdraws inside the stated deadline.
How much should a buyer offer?
Enough to be credible in that market, typically 1% to 3% on property and a negotiated flat sum on business or equipment deals, since too small a deposit signals a buyer who may not complete.
Who earns any interest on the money while it sits in escrow?
That depends on the escrow agreement and local rules, but on short holding periods the interest is usually immaterial and often retained by the escrow agent to cover its administration.
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