We are looking at an offer where the buyer wants to use a massive seller note as a direct offset for any post-closing indemnity claims instead of using a standard escrow. How do we structure the set-off rights in the promissory note so they cannot unilaterally withhold our payments over frivolous warranty claims?

Question

Tyler Smith · Accepted Answer

When a buyer attempts to use a seller note as an indemnity basket, they are looking for a cheap way to self-fund their own post-close complaints. If you allow unrestricted set-off rights, the buyer can unilaterally stop making interest or principal payments by simply asserting a breach of representations and warranties. You cannot let them act as judge, jury, and executioner.

To protect your position, you must negotiate a restricted set-off provision in the promissory note. First, insist that no set-off is permitted for any disputed claims until there is a final, non-appealable judgment from an arbitrator or court, or a mutual written agreement. Second, require that any withheld funds must be placed into a third-party escrow account rather than remaining in the buyer's bank account. This forces the buyer to part with the cash, which immediately discourages them from raising frivolous claims just to preserve their working capital.

Finally, align this with your EOS® framework. During your sell-side preparation, use your weekly Level 10 Meeting™ to review the schedule of representations and warranties. Use the IDS® process to identify potential exposure points in your contracts, customer agreements, and employee records. By resolving these issues before signing, you minimize the buyer's grounds for any claims. Your promissory note must clearly state that the seller financing is an independent debt obligation, subject to default remedies, and cannot be used as a convenient negotiation lever post-close.