Indemnification
November 08, 2022
by a searcher from The University of Chicago - Booth School of Business in Chicago, IL, USA
I'm in the process of negotiating an LOI on a business, and have run into an ask from the seller that I'm not sure how to take. I'd mentioned in the LOI that the definitive purchase agreement would contain indemnification provisions up to the full purchase price. The sellers want to limit indemnity to the seller note only (10% of the purchase price). To me, this seems to be problematic considering the information asymmetry in any deal, but I'm not sure whether my take is reasonable. Any thoughts would be appreciated.
in Barcelona, Spain
On the one hand in the SPA you will have the reps & warrants. This should limit the completition of the deal to the terms specified in there. Hence, if something covered in the R&W does not happen, you could rever the deal and "return" the company to the owner.
On the other hand you can normally set an escrow account that would cover any potential liabilities identified in the due diligence. For example, any tax liabilities under investigation. This amount normally is released when the liability is due. Hence, in my opinion you should justify the amount of indemnity and set a due date for each liability / indemnity.
Hence, indemnity amounting to a 10% of the EV sounds reasonable to me, as long as you do not identify potential liabilities over a 10% of the EV. (Assuming that the EqV is more or less equal to the EV, if the latter is much higher, make sure that a 10% makes sense to you).
Let me know if I can help you further.
Best luck
from University of Miami in New York, NY, USA