Indemnities are contractual obligations in a purchase and sale agreement that require the seller to compensate the buyer for specific losses arising from defined events, typically breaches of representations or pre-closing liabilities.

Every purchase and sale agreement includes an indemnification regime that defines what the seller is responsible for after closing if something they represented turns out to be inaccurate or incomplete. A tax liability that was not disclosed. A customer contract that was misrepresented. An environmental issue that predates the sale. Each triggers an indemnity claim that the seller must satisfy from their own proceeds.

The indemnification regime has multiple variables that are negotiated: the scope of what is covered, the survival period during which claims can be made, the deductible below which claims are not compensable, the cap above which the seller’s liability does not extend, and the mechanism for resolving disputed claims. A seller who agrees to broad indemnities with a long survival period and a high cap has effectively retained significant financial exposure post-closing, exposure that can reduce the effective purchase price materially if claims materialize.

Indemnity exposure is one of the most consequential and least understood dimensions of what a seller agrees to at closing. See how Wefinx approaches exit planning.

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