The buyer is structuring our transaction with a substantial seller note but is demanding that any indemnity claims for representations and warranties breaches be offset dollar-for-dollar against the outstanding principal of our note. How do we limit their ability to use arbitrary indemnity claims to wipe out our seller financing?

Question

Tyler Smith · Accepted Answer

Having a buyer offset indemnity claims against a seller note is a common tactic to claw back the purchase price post-closing. To protect your capital, you must negotiate strict limits on how and when the buyer can offset any claims against the principal of your note. First, establish a high basket and a cap on indemnity claims in the purchase agreement. A basket ensures the buyer cannot make claims for minor issues until they accumulate to a significant threshold, and a cap limits their total recovery. Second, specify that the buyer cannot unilaterally withhold payments or deduct from the note principal. Require that any disputed indemnity claim must be resolved by an independent arbitrator or mutually agreed upon before any offset can occur. Third, structure the promissory note so that interest continues to accrue on any withheld amounts during a dispute, and if the arbitrator rules in your favor, the buyer must pay your legal fees. By establishing these clear boundaries, you prevent the buyer from using manufactured representations and warranties disputes as a backdoor discount tool to avoid paying the full value of your seller note.