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