The buyer wants our seller note to serve as the primary source for satisfying any post-closing indemnity claims, but we want them to purchase representation and warranty insurance instead. How do we negotiate the balance between a seller-financed note and third-party insurance to protect our cash at close?

Question

Tyler Smith · Accepted Answer

Buyers love to treat a seller note as a convenient bucket to draw from whenever they claim a breach of representations and warranties. If they control the note, they can unilaterally withhold payments, shifting the burden of proof to you. To prevent this, you must push for representation and warranty insurance, commonly known as RWI, as the primary source of recovery for indemnity claims. Explain to the buyer that utilizing RWI aligns both parties. It provides the buyer with a highly creditworthy institutional insurer to back up their claims, while allowing you to walk away from the closing table with your proceeds fully realized. Suggest splitting the cost of the RWI premium as a gesture of goodwill. This is often a small price to pay to secure your cash. If the buyer still insists on holding back a portion of the seller note for indemnity claims, you must structure a clear boundary. Insist that any claims must first exhaust the RWI policy deductible before they can touch your seller note. Furthermore, require that any disputed amounts from the seller note be placed in an independent, third-party escrow account rather than being withheld unilaterally by the buyer. Use your historical performance metrics and your clean Business Integrity Review to prove that your operational risks are minimal, justifying a lower indemnity cap and a cleaner transition. This keeps your cash flow secure and prevents the buyer from holding your note hostage over minor integration issues.