The buyer is insisting on an asset sale to protect themselves from successor liability, but we are worried about the post-close indemnification escrows. How do we structure the deal to limit our long-term liability while agreeing to their preferred structure?

Question

Tyler Smith · Accepted Answer

When a buyer insists on an asset sale, they are trying to leave behind your historic operating liabilities. However, they will still demand extensive representations and warranties, backed by an escrow account that holds back ten to fifteen percent of your purchase price. This leaves you with significant post-closing liability. To protect yourself, you should negotiate the purchase of representations and warranties insurance. This insurance shifts the risk of breach from your pockets to an insurance carrier. While this introduces a transaction cost, it allows you to reduce your cash escrow at close to as low as one percent of the transaction value. Additionally, you must tightly define your indemnification limits in the asset purchase agreement. Ensure your liability is capped at a reasonable percentage of the purchase price, and establish a clear basket or deductible that the buyer must exceed before making any claim. Finally, use your Step by Step Exit Business Integrity Review to build a comprehensive disclosure schedule. By documenting every minor operational variance, employee status, and contract detail upfront, you prevent the buyer from claiming you misrepresented the business. This thorough preparation is your best defense against post-close claims.