The buyer is insisting on a seller note to bridge our valuation gap but wants a broad right of set-off that allows them to deduct any indemnity or warranty claims directly from our monthly principal payments. How do we limit this right of set-off to protect our cash flow?

Question

Tyler Smith · Accepted Answer

A broad right of set-off essentially turns your seller note into an interest-free insurance policy for the buyer. If they claim a customer contract was misrepresented, they can unilaterally stop paying you, forcing you to sue them to get your money back. You must restrict this mechanism to prevent the buyer from becoming the judge, jury, and executioner of their own claims. First, negotiate a clause stating that no set-off can occur unless the claim is undisputed, or has been resolved by a final, non-appealable court order or binding arbitration. If the buyer insists on immediate relief, require that any disputed amounts be paid into an independent third-party escrow account rather than withheld entirely. This keeps the cash out of the buyer's operational pocket and incentivizes them to resolve the dispute quickly. Second, establish a basket and a cap. The buyer should not be allowed to set off any claims until the aggregate value of those claims exceeds a certain threshold, such as one percent of the purchase price. Once that threshold is met, the maximum amount they can ever set off against the note should be capped at a small fraction of the total note value, leaving the rest of your monthly cash flow secure.