We signed our LOI with a target purchase price, but now the buyer is using the definitive purchase agreement drafting phase to sneak in broad indemnity caps and restrictive covenants that shift all the post-close risk back to us. How do we structure our indemnification limits and survival periods to protect our net walkaway cash?

Question

Tyler Smith · Accepted Answer

Once the letter of intent is signed, the balance of power shifts to the buyer. During the transition from LOI to definitive purchase agreement, buyers often try to erode your walkaway cash by negotiating aggressive indemnity caps, low baskets, and long survival periods for representations and warranties. To protect your capital, you must negotiate these structural terms early. Your goal should be to limit general representations to a twelve-month survival period, matching one full business cycle, and cap your total indemnity liability at ten percent or less of the purchase price. For fundamental representations, such as ownership of shares and tax compliance, buyers will demand longer survival periods. You can counter this exposure by insisting on the use of representation and warranty insurance. This shifts the risk of post-close claims to a third-party insurer, allowing you to walk away with clean cash and minimal escrow holdbacks. Keep your leadership team focused on their weekly Rocks and Scorecard metrics during this intense drafting phase. If your operational performance dips while the attorneys are arguing over the purchase agreement, the buyer will use that operational slip to renegotiate the purchase price before closing. Keep the business running strong to maintain your leverage.