Negotiating the sale of a business can be a long and arduous process. Once approaching the finish line, many business owners are eager to sign on the dotted line. While the eagerness is understandable, failing to fully appreciate your ongoing legal obligations can come back to bite you.
Obligations Under an Indemnification Provision
Other than the provisions involving the business purchase price and payment terms, indemnification provisions are among the most important. From the seller’s perspective, the indemnification provisions should be drawn as narrowly as possible so as to avoid significant legal liability after the closing.
In basic terms, an indemnification provision shifts the liability for identified post-sale costs or losses from the buyer to the seller. In most cases, the losses covered by the indemnification provision must be related in some to way to representations, warranties, or other seller obligations established in the purchase agreement. In other cases, the buyer may require the seller to indemnify specific losses, such as those related to environmental contamination, tax obligations, or outstanding legal claims.
Limiting the Seller’s Post-Sale Liability
Because indemnification is closely related to the seller’s representations and warranties, it is imperative to review these contract provisions very carefully. Whenever possible, sellers should seek to address potential liabilities prior to putting the business up for sale, which can limit the representations and warranties a buyer may require.
Because violations of the seller’s representations and warranties can trigger indemnification, the disclosure of any adverse material facts should also be thoroughly documented during the negotiation process and acknowledged in writing by the buyer. Doing so helps address the threat of a buyer suing the seller for breach of warranties and representations when the adverse facts result in business costs or losses after the sale closes. For instance, the seller may disclose that a certain employee has raised an internal sexual harassment complaint. Unless the seller has agreed to indemnify the buyer for the claim, the buyer can’t hold the seller accountable if the worker later files a lawsuit.
As highlighted in a prior post, sellers can also limit their post-sale liability for minor losses and set a cap on their indemnification obligation. A “basket” sets a monetary threshold that must be exceeded for indemnification to kick in. Meanwhile, a “cap” limits the total amount of money that must be paid under the indemnification provision in the event of a breach.
Sellers should also try to limit the “survival period” for bringing claims for breach of the contract representations and warranties. Under New Jersey’s statute of limitations for breaches of contract, an aggrieved party typically has six years to bring a claim. However, sellers can often negotiate a much shorter survival period of 12-18 months in the purchase and sale agreement.
As highlighted above, there are several opportunities for sellers to limit their post-sale liability. When negotiating indemnification provisions, it is imperative to have a skilled negotiator in your corner.
Are you currently in the process of selling a business? Would you like to discuss the matter further? If so, please contact me, Dan Brecher, at 201-806-3364.
Does Your Homeowners Insurance Provide Adequate Coverage?
Your home is likely your greatest asset, which is why it is so important to adequately protect it. Homeowners insurance protects you from the financial costs of unforeseen losses, such as theft, fire, and natural disasters, by helping you rebuild and replace possessions that were lost While the definition of “adequate” coverage depends upon a […]
Understanding the Importance of a Non-Contingent Offer
Making a non-contingent offer can dramatically increase your chances of securing a real estate transaction, particularly in competitive markets like New York City. However, buyers should understand that waiving contingencies, including those related to financing, or appraisals, also comes with significant risks. Determining your best strategy requires careful analysis of the property, the market, and […]
Fred D. Zemel Appointed Chair of Strategic Planning at Scarinci & Hollenbeck, LLC
Business Transactional Attorney Zemel to Spearhead Strategic Initiatives for Continued Growth and Innovation Little Falls, NJ – February 21, 2025 – Scarinci & Hollenbeck, LLC is pleased to announce that Partner Fred D. Zemel has been named Chair of the firm’s Strategic Planning Committee. In this role, Mr. Zemel will lead the committee in identifying, […]
Novation Agreement Process: Step-by-Step Guide for Businesses
Big changes sometimes occur during the life cycle of a contract. Cancelling a contract outright can be bad for your reputation and your bottom line. Businesses need to know how to best address a change in circumstances, while also protecting their legal rights. One option is to transfer the “benefits and the burdens” of a […]
What Is a Trade Secret? Key Elements and Legal Protections Explained
What is a trade secret and why you you protect them? Technology has made trade secret theft even easier and more prevalent. In fact, businesses lose billions of dollars every year due to trade secret theft committed by employees, competitors, and even foreign governments. But what is a trade secret? And how do you protect […]
What Is Title Insurance? Safeguarding Against Title Defects
If you are considering the purchase of a property, you may wonder — what is title insurance, do I need it, and why do I need it? Even seasoned property owners may question if the added expense and extra paperwork is really necessary, especially considering that people and entities insured by title insurance make fewer […]
No Aspect of the advertisement has been approved by the Supreme Court. Results may vary depending on your particular facts and legal circumstances.
Sign up to get the latest from our attorneys!
Explore What Matters Most to You.
Consider subscribing to our Firm Insights mailing list by clicking the button below so you can keep up to date with the firm`s latest articles covering various legal topics.
Stay informed and inspired with the latest updates, insights, and events from Scarinci Hollenbeck. Our resource library provides valuable content across a range of categories to keep you connected and ahead of the curve.
Traps to Avoid When Selling a Business
Author: Dan Brecher
Traps to Avoid When Selling a Business: Indemnification Provisions
Negotiating the sale of a business can be a long and arduous process. Once approaching the finish line, many business owners are eager to sign on the dotted line. While the eagerness is understandable, failing to fully appreciate your ongoing legal obligations can come back to bite you.
Obligations Under an Indemnification Provision
Other than the provisions involving the business purchase price and payment terms, indemnification provisions are among the most important. From the seller’s perspective, the indemnification provisions should be drawn as narrowly as possible so as to avoid significant legal liability after the closing.
In basic terms, an indemnification provision shifts the liability for identified post-sale costs or losses from the buyer to the seller. In most cases, the losses covered by the indemnification provision must be related in some to way to representations, warranties, or other seller obligations established in the purchase agreement. In other cases, the buyer may require the seller to indemnify specific losses, such as those related to environmental contamination, tax obligations, or outstanding legal claims.
Limiting the Seller’s Post-Sale Liability
Because indemnification is closely related to the seller’s representations and warranties, it is imperative to review these contract provisions very carefully. Whenever possible, sellers should seek to address potential liabilities prior to putting the business up for sale, which can limit the representations and warranties a buyer may require.
Because violations of the seller’s representations and warranties can trigger indemnification, the disclosure of any adverse material facts should also be thoroughly documented during the negotiation process and acknowledged in writing by the buyer. Doing so helps address the threat of a buyer suing the seller for breach of warranties and representations when the adverse facts result in business costs or losses after the sale closes. For instance, the seller may disclose that a certain employee has raised an internal sexual harassment complaint. Unless the seller has agreed to indemnify the buyer for the claim, the buyer can’t hold the seller accountable if the worker later files a lawsuit.
As highlighted in a prior post, sellers can also limit their post-sale liability for minor losses and set a cap on their indemnification obligation. A “basket” sets a monetary threshold that must be exceeded for indemnification to kick in. Meanwhile, a “cap” limits the total amount of money that must be paid under the indemnification provision in the event of a breach.
Sellers should also try to limit the “survival period” for bringing claims for breach of the contract representations and warranties. Under New Jersey’s statute of limitations for breaches of contract, an aggrieved party typically has six years to bring a claim. However, sellers can often negotiate a much shorter survival period of 12-18 months in the purchase and sale agreement.
As highlighted above, there are several opportunities for sellers to limit their post-sale liability. When negotiating indemnification provisions, it is imperative to have a skilled negotiator in your corner.
Are you currently in the process of selling a business? Would you like to discuss the matter further? If so, please contact me, Dan Brecher, at 201-806-3364.
Let`s get in touch!
Sign up to get the latest from the Scarinci Hollenbeck, LLC attorneys!
