The buyer is insisting on a seller note for fifteen percent of the purchase price, but we want to avoid escrow cash-drags by using this note as the sole source of recovery for any post-close indemnification claims. How do we structure a bilateral offset clause in the seller note to protect our liquid cash while giving the buyer a reasonable security mechanism?

Question

Tyler Smith · Accepted Answer

Using a seller note to fund a portion of your transaction is a common way to bridge a valuation gap, but it leaves you vulnerable if the buyer asserts bad-faith indemnification claims post-close. If your only security is a joint-instruction escrow, the buyer can easily block the release of your funds.

To protect your liquid cash, negotiate a bilateral offset clause in your seller note. This clause allows any legitimate, resolved indemnification claims to be deducted directly from the outstanding principal balance of your seller note, rather than being paid out of your hard-earned cash at close or an escrow account. This makes the seller note the buyer's sole and exclusive source of recovery for any post-closing claims, except in cases of actual fraud.

This structure forces the buyer to think twice before filing frivolous claims. Because any claim directly reduces the balance of the note, they cannot starve you of cash or force you into expensive litigation to recover funds held in a bank escrow.

Ensure the offset clause requires a clear dispute resolution process. If the buyer asserts a claim, they must provide detailed written evidence. If you dispute the claim in your next leadership alignment meeting, they must continue making their regular principal and interest payments on the undisputed portion of the note. The disputed amount should be paid into a separate, interest-bearing registry until the issue is resolved by an independent arbitrator. This keeps the leverage in your hands.