The buyer wants to use our seller note as a convenient bucket to offset any post closing indemnity claims, meaning they can unilaterally stop payments. How do we limit their set off rights to prevent them from fabricating disputes to avoid paying the note?

Question

Tyler Smith · Accepted Answer

Allowing a buyer unrestricted set off rights against your seller note is a recipe for disaster. It gives them the unilateral power to withhold your payments over minor, unverified indemnification claims, effectively forcing you to fund their operational adjustments post closing. You must negotiate strict limits on these rights in the purchase agreement.

First, demand that the buyer cannot offset any payments unless a claim has been resolved by a binding third party arbitrator or a final court order. Unilateral withholding should be strictly prohibited. Second, negotiate a basket and a cap specifically for set off claims. The buyer should not be allowed to deduct anything from your note until their total valid claims exceed a meaningful basket amount, such as one percent of the transaction value. Once that threshold is crossed, only the excess amount should be subject to a set off.

Third, require that any disputed amounts be paid into an independent escrow account rather than kept in the buyer bank account. This forces the buyer to actually part with the cash during the dispute, which eliminates their financial incentive to manufacture frivolous claims just to preserve their liquidity. By requiring escrow and third party validation, you protect your seller note stream of payments and force the buyer to act in good faith.