The buyer wants us to carry a large seller note, but we want to tie their ability to offset claims against that note to a very narrow, contractually defined set of operational breaches. How do we structure this set-off right to prevent them from clawing back our money over minor post-close disputes?

Question

Tyler Smith · Accepted Answer

If you accept a seller note, the buyer will try to write in a broad right of set-off. This allows them to unilaterally withhold your note payments if they claim you breached any representation or warranty in the purchase agreement. If they run the business poorly or experience post-close buyer remorse, they will manufacture a minor dispute and stop paying you. To protect your proceeds, you must limit their set-off rights.

First, negotiate to exclude any set-off rights for general representations. The right to withhold payments should only apply to breaches of fundamental representations, like ownership of shares, tax liabilities, or environmental issues.

Second, insist on a basket and a cap. The buyer should not be allowed to offset any payments until their total claims exceed a specific basket amount, and the maximum offset must be capped at a small fraction of the total note.

Third, require any disputed offset amount to be placed into a third-party escrow account rather than kept in the buyer's pocket. If they want to claim a breach, they must still pay the cash out of their operating accounts into escrow. This forces them to run a proper dispute resolution process rather than starving you of cash flow. Use your weekly Thinking Time sessions to model out how this set-off mechanism interacts with your post-closing personal liquidity needs.