A 60 Second Seller’s Guide to the Purchase Agreement: Indemnification

A 60 Second Seller’s Guide to the Purchase Agreement: Indemnification

Anyone interested in giving back some of the money from the sale of your company?  No?

Money has been exchanged. The business has been acquired. The transaction is complete. Golf and sailboats galore.  Any issues and losses arising after this point fall onto the buyer.

Not so fast. Most purchase agreements contain an indemnification provision that can come back and bite you.  Many people think indemnification means that you are responsible for paying money if something you do hurts the other party.  That’s true in an acquisition, but it is much broader.  An indemnification provision covers things like breaches of the representations and warranties, not just direct financial losses.

As the seller, you want to reduce your liability after the deal is done.   You want a maximum liability in all or almost all events and you want a term limit on the liability.  Expect to see “fundamental” representations important to a buyer that have a longer-term limit and sometimes a greater maximum liability cap.  Another type of liability limitation is a “basket”– a limit on breaches or inaccuracies until the buyer’s losses exceed a set dollar amount. If a third party (not the buyer) files a lawsuit against the business, you can negotiate the right to chose your own attorney at your expense – because the buyer would hold you liable regardless. You may also agree that your shareholders will be jointly and severally liable for the buyer’s indemnification claims. That means the buyer can hold you alone liable, your shareholders alone liable, or hold both you and your shareholders liable.  If the buyer holds back any of the purchase price in escrow, the buyer will usually want to be able to apply that hold back to cover any losses. 

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