The buyer is demanding that any indemnification claims they make post-close can be directly offset against our outstanding seller note. How do we limit this right of offset so they cannot unilaterally stop making payments over minor representations and warranties disputes?

Question

Tyler Smith · Accepted Answer

A right of offset is a standard buyer request, but without strict guardrails, it turns your seller note into an interest free piggy bank for the buyer's post-close buyer remorse. If the buyer can unilaterally withhold payments based on a mere allegation of a breach, you lose your leverage and your cash flow.

To protect yourself, you must negotiate three specific limitations in the purchase agreement. First, establish a basket or deductible. The buyer should not be allowed to offset anything until cumulative indemnification claims exceed a meaningful threshold, such as one percent of the purchase price. This prevents nickel and diming over minor operating issues.

Second, require that any disputed offset amount be placed into a third-party escrow account rather than withheld entirely. This ensures the buyer actually parts with the cash and cannot use the funds to improve their own working capital while you fight. It also incentivizes them to resolve the dispute quickly.

Third, explicitly limit the offset right to finally determined claims. This means the buyer cannot withhold payments for a claim unless you agree to it in writing or a court or arbitrator issues a final ruling. By forcing them to prove their claim before withholding your cash, you maintain the upper hand.