We are structuring our exit using a Section 453 installment sale, but the buyer wants to link our unpaid seller note to their post-close indemnification claims through a right of set-off. How do we structure this to protect our payments from being unilaterally frozen?

Question

Tyler Smith · Accepted Answer

When a buyer inserts a broad right of set-off into a seller note, they are giving themselves the power to act as judge, jury, and executioner. If they claim you breached a representation or warranty post-closing, they will simply stop making installment payments. This completely bypasses the agreed-upon dispute resolution process and forces you to fight to get your own money back. To protect your cash flow, you must negotiate strict limitations on their set-off rights. First, establish that the buyer cannot withhold any payments for a disputed claim unless they first deposit the withheld amount into an independent escrow account. This prevents them from using your money as operating capital while the dispute drags on. Second, insist that no set-off can occur until there is a final, non-appealable third-party determination or a mutual written agreement. The default position must be that the buyer continues to pay you under the Section 453 note unless a court or arbitrator rules otherwise. Third, cap any potential set-off claims at a small fraction of the total note value, and completely exclude fundamental representations from being settled through note deductions. Finally, tie this operational discipline to your transition plan. Make sure your leadership team is running the company using the EOS® framework so that operational handoffs are clean. When your Accountability Chart clearly defines who owns post-close transition tasks, the buyer has far less room to manufacture operational claims to justify a set-off. Keep the note clean and independent of daily post-close friction.