Handling Customer Deposits in a Business Sale:
In business sales, it’s often the overlooked details that cause the biggest problems. One that comes up more than you’d think? Customer deposits.
If you’re selling—or buying—a business that takes upfront payments for future services (think wedding venues, party halls, catering companies), you need to be extremely clear about how those deposits are handled.
Deposits Are Not Revenue (Yet)
Many owners treat deposits as earned income the moment they hit the account. They use them to cover day-to-day expenses, especially if the business is light on working capital.
But here’s the truth: that money hasn’t been earned yet. From an accounting and legal standpoint, a deposit is a liability—a promise to provide a service in the future. Until that service is delivered, the money belongs to the customer, not the business.
What Happens When the Business Is Sold?
Let’s say a buyer takes over a business that has $50,000 in deposits for future events. If the buyer is expected to honor those bookings, then they must also receive the cash to cover them.
Anything else is a non-starter.
The proper way to handle it:
- The buyer receives both the customer deposit cash and the matching liability on the balance sheet.
- As events are fulfilled, the liability is reduced and the revenue is recognized.
What You Can’t Do
Some sellers believe they can keep the deposit funds and simply have the buyer “agree” to honor the bookings. That’s a dangerous move.
Unless every customer signs off on a legal novation (which is very unlikely to happen), the seller remains on the hook if something goes wrong. Worse, it creates confusion, exposes the buyer to unfair risk, and undermines trust in the entire deal.
Buyers: Don’t Overlook This
If you’re buying a business, dig into:
- How much of the cash on hand represents unearned deposits
- Whether those bookings are still viable
- How the seller plans to handle those funds at closing
If you’re being asked to deliver services without receiving the deposit funds, you’re inheriting a liability without the matching asset. That’s a red flag.
Sellers: Get This Right Before You Go to Market
If you want a smooth transaction, clarify early:
- How deposits will be handled
- That any deposits for future events will either be transferred to the buyer or refunded to customers
- That all parties understand and agree to the treatment of these funds
- On the day of closing the buyer should receive a schedule of all outstanding deposits and this amount should be transferred
Trying to sort this out late in the deal is a recipe for mistrust—and possibly legal trouble.
Final Thought
If you’re unsure how to handle this in your own transaction, get advice from someone who’s been through it. A good broker (or M&A advisor) will spot this issue early and help structure a fair, legal, and clear solution.