We are structuring our exit using a Section 453 installment sale, but the buyer demands a right of offset to deduct indemnity claims directly from our future payments. How do we structure this offset provision to prevent unilateral deductions?

Question

Tyler Smith · Accepted Answer

Buyers love the right of offset because it allows them to act as judge, jury, and executioner. If they claim a breach of a representation or warranty post-close, they can simply stop making their installment payments under Section 453, forcing you to sue them to get your money. You must refuse any unilateral right of offset. If an offset provision is required to close the deal, structure it with strict procedural guardrails. First, establish that the buyer cannot withhold any payments for a disputed claim. They can only offset payments after a claim has been finally determined by a non-appealable joint settlement or a third-party arbitration ruling. Second, if the buyer insists on holding back funds during an active dispute, require them to deposit the disputed amount into an independent, third-party escrow account rather than keeping it in their own bank account. This keeps them honest because they do not get to keep the cash while the dispute is sorted out. Third, include a materiality threshold. Minor disputes should never impact your installment payments. Only allow potential offsets for claims that exceed your negotiated basket limit. This protects your cash flow and ensures that your Section 453 tax deferral strategy remains intact without unexpected financial disruptions.