4 Important Buy-Sell Indemnity Issues
Some buy-sell agreements are worded with such legalese it is sometimes a daunting task to figure out what reps and warranties have been made and what could possibly go wrong.
When you sell, or buy, alarm accounts you can expect indemnity issues and contractual provisions. Surprisingly, these legal issues are not well understood by many attorneys involved in these transactions and most alarm company owners are even less familiar with the indemnity issues when it comes to these sale transactions.
There are essentially four indemnity issues in the buy-sell transaction.
Attrition indemnity: Most of you (and attorneys you may engage for one reason or another) are familiar with this, and likely erroneously refer to it as the holdback. This indemnity is really a guarantee that the accounts you sell will remain the buyer’s accounts after a period of time. To the extent they are not, the seller has to reimburse the buyer for whatever the buyer paid (or agreed to pay) for the account that terminated during the guarantee period.
The so-called holdback is actually the part of the purchase price that is held back by the buyer, or placed into escrow, at time of closing and held until the end of the guarantee period. There are many variables that go into the attrition guarantee. If you don’t use an attorney very familiar with how to structure this provision you are going to hit or miss the customary provisions, assuming we can consider any provision customary as opposed to the culmination of intense negotiation.
Trade and other debt indemnity: This is the most reasonable of the indemnity provisions because it is only fair that, unless a seller has disclosed debt and the buyer has agreed to assume and pay that debt, the seller should be responsible for it. If the buyer ends up getting sued for that debt, the seller should indemnify the buyer; that means defending the claim and paying the debt. As straightforward as this seems to be, some attorneys have managed to complicate it with various scenarios.
Representations and warranties indemnity: This is a very risky provision. Some buy-sell agreements are worded with such legalese and every paragraph referencing at least one other paragraph, exhibit or schedule, it is sometimes a daunting task to figure out what reps and warranties have been made and what could possibly go wrong. The broader the rep and warranty is, the greater the likelihood that a buyer will be able to make a claim under this indemnity. The seller should not expect any claim under this indemnity unless the seller knows that the reps and warranties in the buy-sell agreement were not accurate when made. Or worse, they didn’t know one way or the other if they were accurate and now it turns out they aren’t accurate.
Some good examples of this are “all systems are in working order,” or “all systems were installed per code or manufacturer specifications” or “all contracts are enforceable.” Typically, an alarm company owner has no idea if those are true statements unless it’s a one-person operation and the owner knows every system and customer. Even then, the owner has no business warranting that every contract is enforceable because for sure the owner isn’t in a position to make that kind of legal conclusion. You need to be very careful with this indemnity provision.
Claims by subscribers and third parties for loss: This indemnity provision is often lumped in with the trade and other debt indemnity, and that’s a mistake. This indemnity involves legal and factual issues that are unique to its category. Too many attorneys don’t understand the difference between “occurrence” and “claims made” policies. Even if they do know the difference, they aren’t really sure how it pertains to the alarm industry and particularly the buy-sell agreement.
I insist on two very clear and succinct provisions to deal with this category of indemnity in every buy-sell transaction I am involved with. In my experience this indemnity is best handled by two sentences, so if your buy-sell agreement doesn’t deal with it just as clearly, then first, change attorneys, and second, fix the agreement. It’s so important that you may have to change the buyer or seller because this is a deal killer.
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