This is Part V of a multi-part blog dealing with seller indemnities in business sale transactions. Part I dealt with dollar limitations. Part II touched on seller indemnities. Part III touched on time limitations. And Part IV addressed subject matter limitations. This final blog on this subject will take a brief look at two other options available to a buyer to protect itself post-closing if the seller does not make good on its indemnity promises within the agreement.
One common method utilized is escrowing a certain percentage of the sales price from the closing funds for a certain period of time. The dollar amount escrowed and the time for which the funds are escrowed depends on the facts and circumstances in each particular transaction. In a recent transaction we did, the amount escrowed came to about 6.5% of the sales price. In that transaction the funds were escrowed with a bank for 18 months. We have had transactions where the amounts have been greater and lesser and the time periods have been longer and shorter. In the recent transaction referred to above, the buyer did agree to cancel the escrow and release funds after twelve months.
A second method used as an alternative to or in conjunction with the escrow method is the promissory note right-of-offset provided to the buyer. Under this method, the buyer is provided the right to set off amounts due seller arising out of the failure of seller to properly indemnify buyer as specifically spelled out in the agreement. Discussion often arises as to whether this right of offset applies to current payments or back-end payments and to other matters as well.
I am often asked if I can’t pull a “standard agreement” off the shelf to document a business sale transaction. Not every agreement starts from scratch to be sure. But there are many, many variables in a business sale transaction that makes “one size fits all” a bit unrealistic. These five blogs have covered just one aspect of a business sale transaction. And even within this one area, there are many variables to be dealt with.
We wish everyone a happy, healthy and prosperous new year.
Michael W. Margrave
Disclaimer: This blog is for information purposes only. Legal advice is provided only through a formal, written attorney/client agreement.