No Seller Indemnity: Insuring a $38 Million Business Sale

The situation

Franco spent close to fifteen years as a police sergeant before he and Elena, who had built a career as a software developer, pooled their savings and their evenings into a small investment partnership on the side. What started as buying into a friend's business a decade earlier grew into something larger: a private equity fund eventually backed their partnership with committed capital, and Franco and Elena became the principals of an acquisition vehicle focused on mid-market manufacturers across southwestern Ontario. Neither of them had planned to leave their original careers behind entirely, but by the time this deal came together, running the vehicle had become the bigger job.

The target was a Cambridge precision parts manufacturer that Ramon had built from a two-person machine shop into a company supplying components to industrial and automotive customers across North America. Ramon was in his early sixties, had no succession plan among family, and wanted out entirely rather than staying on as a minority partner. Franco and Elena's fund liked the business: steady margins, a diversified customer list, and a management team willing to stay through a transition. The two sides agreed on a purchase price of roughly $38 million and set about negotiating the terms that would sit underneath that number.

Ramon made one condition clear from the first serious conversation about terms: he was not willing to have any meaningful part of his proceeds held back after closing, and he was not willing to remain personally on the hook for problems that surfaced in the business after he no longer controlled it. He had spent thirty years building the company. He wanted the sale to actually be a sale.

The legal problem

In a typical private company sale, the seller makes a long list of representations and warranties — factual statements in the purchase agreement about the state of the business: that its financial statements are accurate, that it owns what it says it owns, that there is no undisclosed litigation, that its contracts are what they appear to be, and dozens of similar assurances. If one of those statements turns out to be false and the buyer suffers a loss because of it, the buyer's usual remedy is indemnification — a contractual right to be compensated by the seller. To make sure money is actually available to pay an indemnification claim, buyers typically negotiate an escrow: a portion of the purchase price, often somewhere between five and fifteen percent, held by a third party for a year or two after closing rather than paid out immediately.

That structure protects the buyer, but it comes at a real cost to the seller. An escrow holdback means the seller does not get full value for the business on closing day. A personal indemnity obligation means the seller carries risk tied to a company they no longer control, sometimes for years, over decisions being made by someone else. For a founder like Ramon, who was retiring and wanted a definitive end point, both features of a conventional deal were unacceptable. He had turned down at least one earlier approach from a different buyer over exactly this issue.

For Franco and Elena's fund, walking away from any form of protection was not realistic either. Their investment committee required some mechanism to address the risk that something in the business — an undisclosed liability, an inaccurate financial statement, a contract that was not what it appeared to be — would surface after closing and cost the company money. The two positions, as first stated, were incompatible: a seller who would sign nothing that created ongoing exposure, and a buyer whose backers would not close without some form of recourse if the deal turned out to rest on inaccurate information.

What we did

1. Proposed representation and warranty insurance as the mechanism to bridge the gap. This type of policy, purchased in connection with an acquisition, pays out to the buyer if the seller's representations and warranties turn out to be untrue, in place of — rather than alongside — a large seller indemnity. It let us tell Ramon truthfully that the buyer's protection would come from an insurance policy rather than from money withheld from him, while still giving Franco and Elena's fund a real remedy if something went wrong.
2. Obtained quotes from several insurers early, before the purchase agreement was finalized. Pricing, coverage limits, and each insurer's appetite for this particular industry varied enough that shopping the risk mattered. We used the quotes to set realistic expectations with both sides about what the policy could and could not cover before either party got attached to specific numbers in the agreement.
3. Coordinated the disclosure schedule with the insurer's own diligence process. A representation and warranty policy is only as good as the underwriting behind it, and insurers exclude from coverage anything the buyer's diligence team already knew about or should have found. We made sure the disclosure schedule — the seller's formal list of exceptions to its representations and warranties — was thorough and specific, because a vague or incomplete disclosure schedule creates gaps the insurer will not stand behind later.
4. Negotiated the purchase agreement around a genuine no-indemnity structure. Rather than a conventional agreement with an insurance policy layered on top as extra comfort, we drafted the agreement so that, apart from a narrow set of fundamental representations — things like Ramon's ownership of the shares and authority to sell — the insurance policy was the buyer's sole and exclusive remedy for breaches. That is what let Ramon walk away from closing without an escrow sitting over his head.
5. Addressed the one issue the insurer would not cover. During underwriting, the insurer's environmental consultant flagged a documented but unresolved matter: a Phase II environmental assessment obtained during diligence had identified soil contamination beneath a leased portion of the manufacturing site, dating from a prior tenant, that had never been remediated. Insurers will not cover a known issue — that is a settled feature of how this type of policy works, since insurance exists for the unknown, not for a problem already on the table. That meant the fund's protection on this one specific matter had to come from somewhere other than the policy.

The outcome

The deal closed at the agreed price of roughly $38 million. On everything covered by the representation and warranty policy, Ramon walked away from closing with his proceeds intact and no ongoing personal liability — the outcome he had insisted on from the first conversation. The fund's protection for those matters came from a policy with a coverage limit of about $9.5 million, with the fund itself responsible for a retention, similar to a deductible, of roughly $380,000 before the policy would pay out on a claim. Franco and Elena's investment committee accepted that retention as a manageable cost of getting the deal done on terms Ramon would actually sign.

The soil contamination issue was the one piece that could not be resolved through insurance, and it required real compromise from both sides. Ramon did not get the fully clean exit he wanted on this single point: he agreed to a specific indemnity, capped at $760,000 and backed by an escrow of the same amount held for twenty-four months, covering costs related specifically to that contamination if remediation became necessary. In exchange, Franco and Elena's fund agreed to pursue remediation only if a regulator or a future tenant actually required it, rather than opening an investigation proactively during the escrow period — Ramon was not willing to fund an open-ended inquiry into a problem that had sat quietly for years without causing any operational issue.

Neither side got everything it originally asked for. Ramon left closing with the vast majority of his proceeds unencumbered and no exposure to the ordinary risks of a business he no longer ran, but he did not get the fully unconditional exit he had described in the first meeting. Franco and Elena's fund got the broad protection its investment committee required through the insurance policy, at a real cost — the policy's premium, the retention it had agreed to absorb, and a negotiation that took longer than either side expected because of the one issue insurance could not touch. It was, honestly, a compromise: a deal structure that let both sides live with the result, rather than one where either side got exactly what it first asked for.

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