We are structuring our deal as an installment sale under Section 453 to spread our tax burden over several years, but the buyer is insisting on an offset provision that allows them to deduct any indemnification claims directly from our installment payments. How do we limit this offset right to prevent them from unilaterally withholding our money?

Question

Tyler Smith · Accepted Answer

A buyer will always try to turn an installment note under Section 453 into a cheap insurance policy by demanding unlimited offset rights. If you agree to an unrestricted offset provision, the buyer can make a frivolous indemnification claim and immediately stop paying you, leaving you to fight them in court to get your money back. To protect yourself, you must limit their offset rights in the transaction documents. First, negotiate a basket and a cap on indemnification claims. A basket means the buyer cannot claim any damages until they exceed a certain dollar threshold. A cap limits their total recovery to a small percentage of the purchase price, rather than the entire installment note value. Second, require that any claimed offset amount must be placed into a third-party escrow account rather than withheld directly by the buyer. This prevents the buyer from benefiting from the cash flow of your unpaid note while the dispute is being resolved. Third, establish a strict dispute resolution mechanism. If the buyer asserts a claim, they must provide detailed written evidence within a tight window. If you dispute the claim, the funds must remain in escrow until an independent arbitrator makes a final, binding decision. By structuring these operational and legal guardrails, you ensure that the buyer cannot unilaterally freeze your installment payments over minor disagreements.