The buyer wants to use our seller note as the primary source of recovery for any post-closing indemnity claims, but we want to require them to purchase Reps and Warranties insurance instead. How do we leverage the cost-benefit of RWI to push them off our seller note and secure our proceeds?

Question

Tyler Smith · Accepted Answer

Buyers frequently try to use a seller note as a cheap, self-funded insurance policy for post-closing indemnity claims. This allows them to easily claw back your money over minor disputes. You should push back hard and require them to purchase Reps and Warranties Insurance instead. This shifts the risk of breach claims to a third-party insurer, keeping your hard-earned cash safe. To sell this to the buyer, present a clear cost-benefit analysis during your negotiations. Highlight that Reps and Warranties Insurance allows them to secure much higher liability limits, often up to ten or twenty percent of the enterprise value, whereas a seller note only covers a fraction of that. Explain that this insurance protects the post-close partnership. If a claim arises, they are fighting an insurance company, not their new business partner or former founder. To make this deal-neutral, offer to split the one-time insurance premium at closing. This small concession is a fraction of the cost of having your proceeds tied up in a disputed seller note. Once the policy is in place, structure the purchase agreement so that the buyer's sole recourse for any non-fundamental representation breaches is the insurance policy, completely insulating your seller note and cash proceeds from post-close clawbacks.