Category Archives: NJ Contracts

When is it Appropriate to Use an Indemnification Provision in Selling a Business?

Most people selling their business are unaware (at lease at the outset) that the contract of sale normally includes some sort of indemnification language. There are many variations, but in the typical case, this means that the seller agrees to hold the buyer harmless from claims of third parties relating to what the seller did or did not do when they owned the business. Likewise, the buyer holds the seller harmless from claims of third parties for what the buyer does or does not do after the sale concludes.

Obviously, there are many legitimate variations to this approach. For example, if the seller is going to continue as a consultant or even employee to the business, the indemnification may need to take into account that he should continue to have some sort of indemnification obligation. Likewise, one might decide to define the indemnification obligation as applying to no more than a fixed upper amount or limit it to a certain period of time.

In the extreme case, a buyer or seller might want to take the position that there should be no indemnification provision at all. This includes situations in which the business is being sold for a relatively small sum that is less than the business is actually worth. In such a case, the seller may insist that it is being sold “as is” and “with all flaws” the same way as distressed real estate. In other words, the price figures in the risk inherent in having no indemnification clause.

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