We are structuring our exit with an installment sale under Section 453 to spread out our tax burden, but the buyer wants the right to offset their payments against any future indemnity claims. How do we limit these offset rights to prevent them from clawing back our deferred proceeds over minor issues?

Question

Tyler Smith · Accepted Answer

Buyers frequently use offset rights to turn an installment note into a unilateral post-closing price reduction. If you accept a Section 453 installment structure, you must aggressively limit their ability to withhold payments. Start by requiring a basket and a cap on any indemnity claims before they can touch your note. A basket acts like a deductible, meaning the buyer cannot claim anything until cumulative damages exceed a meaningful threshold, such as one percent of the purchase price. Next, negotiate a strict dispute resolution mechanism. The buyer should not have the unilateral right to stop paying you just because they filed a claim. Require them to place any disputed installment amounts into a third-party escrow account while an independent arbitrator reviews the claim. This prevents them from starving your cash flow to force a settlement. Your installment note should explicitly state that a failure to pay is an immediate event of default, accelerating the entire balance due unless the disputed funds are in escrow. Use your quarterly Rocks to clean up historical liabilities before closing, reducing the target surface area for claims. A clean operation is your best defense against post-close offsets.