How to Handle Indemnification Clauses in Small Business Sales

Indemnification clauses are vital in small business sales, as they allocate risk between the buyer and seller. These clauses specify who will be responsible for certain liabilities post-sale. Here’s how to handle indemnification clauses to protect your interests during a small business sale. They must be taken seriously and negotiated.

What Is an Indemnification Clause?

An indemnification clause requires one party to compensate the other for losses or damages arising from specific situations, such as legal claims, tax liabilities, or contract disputes.

Key Considerations for Indemnification Clauses

Scope of Indemnification: Clearly define what risks the seller will cover, such as pre-existing legal disputes, outstanding debts, or tax obligations.

Indemnity Cap: Limit the seller’s total liability by including a cap on the indemnification amount. This protects the seller from excessive claims.

Survival Period: Establish a time frame during which indemnification claims can be made. Survival periods typically range from 12 to 36 months after the sale.

Negotiating Indemnification Clauses

Buyers should seek broad indemnification terms to protect against unknown risks, while sellers should aim for reasonable limits on their obligations. Both parties should consult legal counsel to draft balanced and fair terms.