The buyer wants a large seller note but is insisting on an unrestricted offset clause that lets them deduct any indemnification claims directly from our monthly principal payments without third-party arbitration. How do we structure the seller financing to protect our note payments from bad-faith claims?

Question

Tyler Smith · Accepted Answer

An unrestricted right of offset turns your seller note into an open-ended piggy bank for the buyer to fund any minor operational hiccup post-close. If a buyer insists on seller financing, they are asking you to act as a junior lender. You must protect that position with the same rigor as a commercial bank. First, negotiate a threshold or basket for indemnification claims before any offsets can be made. This ensures the buyer cannot nickel-and-dime your monthly payments for small, everyday operating issues. Second, require that any disputed claims be placed into a neutral third-party escrow account rather than being withheld unilaterally by the buyer. This forces them to prove their claim before they can stop paying you. To secure your position, utilize your operating data. Show the buyer your clean scorecard history and your documented processes to prove that your operations are highly predictable. If you run your weekly Level 10 Meeting with discipline, you should have years of operational data showing that customer complaints and warranty issues are consistently tracked and resolved. Use this historical data to show that their fears of massive, unrecorded liabilities are unfounded. Finally, ensure the note is backed by a personal guarantee from the buyer or secured by a junior lien on the assets of the company. Never agree to a complete payment blockage if they default on their senior debt. Limit any standstill periods to a maximum of ninety to one hundred and twenty days, ensuring you can take action if the buyer fails to manage the transition properly.