The buyer wants a portion of the purchase price held in escrow for indemnity claims, but we also have a seller note. How do we negotiate the relationship between the escrow account and the seller note to prevent double-exposure on indemnification liabilities?

Question

Tyler Smith · Accepted Answer

Buyers love to secure indemnity claims using both an escrow fund and a right of set-off against your seller note. If you agree to both without clear limits, you expose yourself to double-jeopardy. The buyer can freeze your seller note payments while simultaneously tying up your escrow cash over the exact same disputed claim.

To prevent this, you must establish a strict order of operations in the purchase agreement. First, negotiate that the third-party escrow account is the sole and exclusive remedy for any post-closing indemnity claims up to its cap. Only after the escrow fund is entirely exhausted should the buyer be permitted to look to the seller note for satisfaction.

Second, demand that any offset against the seller note requires either your written consent or a final, non-appealable court order. This prevents unilateral withholding of your interest payments. In our EOS-driven business, we use the V/TO® to keep our eyes on the ultimate destination, and protecting your exit cash is part of that long-term plan.

Do not let a buyer use your own seller note as a cheap insurance policy. Force them to exhaust the escrow first, and ensure any dispute goes through a formal resolution process before a single dime is withheld from your monthly note payments.