The buyer is insisting on a seller note but wants a broad right of offset that allows them to unilaterally withhold payments if they claim we breached any representations and warranties. How do we structure this offset clause so they cannot hold our money hostage over minor disputes?

Question

Tyler Smith · Accepted Answer

Buyers love seller notes because they serve as a cheap source of capital and a convenient bucket for clawbacks. If they claim you breached a representation in the purchase agreement, their first move is to withhold payments on your note. This unilateral right of offset is a trap that turns your hard-earned equity into an interest-free negotiation chip.

You must structure the offset provision to prevent unilateral withholding. First, require that any claimed breach must exceed a specific basket or deductible amount before they can hold back any funds. This prevents them from nickeling-and-diming you over minor, immaterial operational discrepancies.

Second, mandate that any disputed offset amount must be paid into an independent third-party escrow account rather than kept in the buyer's bank account. When the buyer has to actually part with the cash, their incentive to fabricate minor claims drops dramatically.

Third, establish a fast-track dispute resolution process. If they claim a breach, they must present detailed evidence within ten days, followed by mandatory, binding arbitration if you disagree. This prevents them from dragging out the process to starve you of cash. Protect your seller note with the same discipline you used to protect your profit margins.