The buyer's draft of our seller note includes an unrestricted right of offset, meaning they can unilaterally deduct money from our quarterly payments if they claim we breached any minor representation or warranty. How do we structure the note to prevent them from using this offset as a weapon?

Question

Tyler Smith · Accepted Answer

An unrestricted right of offset is a massive risk that allows a buyer to act as judge, jury, and executioner over your remaining proceeds. They can manufacture minor, subjective claims of representation breaches to withhold payments, forcing you to fund costly litigation to get your money back.

To manage this, you must apply the principles of the Trust Equation by lowering self-orientation and establishing an objective, bilateral process.

- First, negotiate the complete removal of the unilateral offset right.
- Second, if the buyer insists on an offset mechanism, restrict it to final, non-appealable third-party judgments or mutual written agreements.
- Third, for any disputed claims, require the buyer to deposit the disputed amount into an independent escrow account rather than keeping it in their bank account. This removes their incentive to manufacture claims to improve their own short-term cash flow.

Additionally, establish a high basket or threshold before any claim can be made against the note. Ensure that minor issues under fifty thousand dollars are completely excluded from offset potential. By creating a structured, multi-step resolution process, you protect your seller financing payments from becoming a tool for post-close renegotiations.