What is Earnest Money Deposit (EMD)?

An Earnest Money Deposit (EMD) is a payment made by a buyer to a seller, showing the buyer's good faith and serious intent to complete a purchase. Think of it as a security deposit for a business acquisition. The EMD is typically held in an escrow account by a neutral third party, like an attorney or an escrow agent, until the deal closes. If the sale goes through, the EMD is usually applied to the purchase price. If the deal falls apart due to reasons outlined in the contract (like a failed due diligence contingency), the EMD is returned to the buyer. However, if the buyer backs out without a valid contractual reason, the seller may have the right to keep the EMD as compensation for their time and lost opportunities.

EMDs are important because they protect both buyers and sellers. For sellers, it reduces the risk of dealing with unserious buyers. For buyers, it shows commitment and can make their offer more attractive. It also provides a clear process for what happens if a deal doesn't close.