Owners spend months negotiating the price of their company. Many then sign the purchase agreement without fully reading the section that decides how much of that price can come back. In almost every sale, the seller makes a long list of written promises about the business: the financial statements are accurate, the taxes are paid, there are no lawsuits you have not mentioned, the equipment is yours. If one of them turns out to be untrue after closing, the buyer can claim money from you. That section deserves the same attention as the number on the first page.
1. What you are actually promising
These promises are called representations and warranties. They are statements of fact about the business, made by you, as of the day you sign and again on the day you close. A buyer cannot verify everything in diligence, so it asks the seller to stand behind what it could not check. The list covers the financial statements, taxes, customer and supplier contracts, employees and how they are paid, permits, environmental matters, inventory and the condition of the assets. Read each one as a plain question: is this completely true of my company today? If the honest answer is "mostly," the time to say so is now, not after closing.
2. The disclosure schedule is your protection
Every promise can be qualified. The disclosure schedule attached to the agreement is where you list the exceptions: the customer dispute from last spring, the lease that needs the landlord's consent, the truck that is financed rather than owned outright. A problem written into the schedule is one the buyer accepted when it signed. The same problem left off becomes a claim. Owners who treat the schedule as paperwork for the lawyers tend to regret it. You know the company better than anyone on either side of the table, so making the schedule complete is your job, with your lawyer's help.
3. The limits on what a buyer can claim
How much you are exposed to after closing comes down to a few negotiated terms. A cap limits the total a buyer can claim, usually set at a portion of the price rather than all of it, with exceptions for fundamental matters such as ownership of what is being sold and taxes. A basket sets a threshold that claims have to pass before the buyer can collect anything, so small items do not turn into a running dispute. A survival period sets how long the promises last after closing. For ordinary business matters it is often a year or two, while taxes and fundamental matters run longer. When the price is the only number anyone is talking about, these terms are easy to overlook, and each one is worth more to you than it looks.
4. Where the money sits while the promises run
A buyer that wants protection will usually ask for part of the price to be set aside, either in an escrow account held by a third party or as a holdback the buyer keeps. Where there is a seller note, the agreement may let the buyer set claims off against what it still owes you. The questions to ask are simple: how much, for how long, and what has to happen before the money is released to you. A holdback released on a fixed date unless a claim has been filed is a very different thing from one that waits for the buyer to agree to let it go.
5. Different buyers negotiate this differently
A private equity group usually arrives with a long, detailed agreement and lawyers who negotiate these terms on every deal. Expect it to push on the cap, the basket and the escrow, and expect your own counsel to push back. At the larger end of the market, some buyers carry insurance against these promises, which can reduce how much is held back from the seller. A competitor often concentrates on the promises closest to why it is buying: the customers, the people and the condition of the equipment. An individual buyer using bank financing may be guided by what its lender requires, and may treat the seller note as its main protection. Knowing who is across the table tells you where this part of the negotiation will be hardest.
The takeaway
The price tells you what a buyer will pay. The representations, the disclosure schedule, the limits on claims and the money held back tell you how much of it you keep. Be candid in the schedule, understand the cap, the basket and the survival period before you sign, and know exactly when any held-back money comes to you. The best time to settle the size of an escrow or holdback is in the letter of intent, while other buyers are still in the picture, not in the last week before closing.
