If your purchase transaction is structured as an asset purchase, the selling entity will agree to indemnify you against any claims arising from the seller’s breach. You must also, however, make sure that the seller’s owners are bound under and execute the purchase agreement. The selling entity typically makes numerous representations and warranties, and other agreements to take action, or refrain from action, after the closing, for the benefit of purchaser. The most common action that a selling entity agrees not to take is to not compete with the purchaser. If a representation or warranty is breached and that breach causes you to incur a loss, you may be left with no practical recourse to collect your losses. This is because a selling entity typically distributes all of the purchase price to its owners during the period that indemnification is in effect. Without the seller’s owners agreeing to make the same representations, warranties, agreements and indemnifications as the selling entity, you could be faced with pursuing a selling entity that has no assets. That would make your indemnification rights in the purchase agreement worthless. So make sure that you insist that the seller’s owners sign onto the purchase agreement.
ABOUT GLENN D. SOLOMON
Glenn D. Solomon Esq., is a principal at the law firm of Offit Kurman and has provided counsel to businesses and business owners for more than twenty-five years, with extensive experience in the purchase and sale of businesses, structuring ownership agreements, and advising companies in financial distress
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