Buying a Construction Company Without a Seller Indemnity

The situation

Meera and Anita ran a small private equity fund that bought established, profitable businesses from owners who were ready to step back. Their target this time was a 30-person construction company in London built over roughly 25 years by its founder, Bohdan. The business did steady, unglamorous work — commercial fit-outs, institutional renovations, the kind of contracts that get renewed rather than won in a bidding war — and it had never missed a payroll.

Bohdan was 64 and wanted out. Not a partial exit, not a phased handover with him staying on as a consultant for three years — a real retirement. He had spent decades personally guaranteeing the company's obligations and did not want any part of his sale proceeds tied up or exposed after closing. Meera and Anita's fund had agreed on a purchase price around $68,000,000, financed partly with the fund's own capital and partly with acquisition debt, and they came to Treadstone Law once the letter of intent — the non-binding document setting out the deal's key terms before the parties negotiate the binding purchase agreement — was signed.

On paper, the deal made sense for everyone. In practice, the two sides had built the letter of intent around a term neither had fully worked through: what would protect the buyer if something about the business turned out to be untrue after closing.

The negotiating gap

In a typical private company acquisition, the purchase agreement includes representations and warranties — the seller's factual statements about the business, covering things like its financial statements, its contracts, its employees, its compliance with regulatory requirements, and its litigation history. If one of those statements turns out to be false, the buyer's remedy is usually an indemnity claim against the seller, often backed by a holdback: a portion of the purchase price, commonly ten to fifteen percent, held in escrow for twelve to twenty-four months after closing specifically to fund those claims.

Bohdan's position was that after 25 years running the business, he knew it better than any due diligence report ever would, and he was not willing to leave several million dollars sitting in an escrow account subject to a buyer's discretion for two years. He had heard enough stories from other owners about indemnity disputes dragging on long after closing to make that a firm line. Meera and Anita's position was equally firm from the other direction: their fund's investors expected real protection against undisclosed liabilities, and a purchase agreement with no indemnity mechanism at all was not something their investment committee would approve.

Both positions were reasonable. Left unresolved, they were also incompatible, and the letter of intent's vague language — "customary indemnification provisions to be negotiated in good faith" — was papering over a gap that would eventually stop the deal if nobody closed it. The risk was not that either side was acting in bad faith. It was that the deal structure everyone had defaulted to, seller indemnity plus escrow, could not satisfy both what Bohdan needed and what the fund's investors required.

What we did

1. Proposed representations and warranties insurance as the actual solution, not a talking point. This type of insurance, sometimes called warranty and indemnity or W&I insurance, pays the buyer directly for losses arising from a breach of the seller's representations, up to a policy limit, in exchange for a one-time premium. It let the buyer keep meaningful post-closing protection while the seller walked away from closing with the purchase price largely intact. We had used this structure before and knew which insurance brokers active in the Canadian market could turn a quote around inside the deal's timeline.

2. Got the fund's investment committee comfortable with the mechanics early. A policy is only as good as its terms, and an unfamiliar risk-transfer tool needs buy-in before it can replace a familiar one. We walked Meera and Anita through how underwriting works, what typically gets excluded from coverage, and what the fund would still be exposed to, so the recommendation to insurers was not a surprise sprung on the investment committee at the eleventh hour.

3. Coordinated the underwriting process alongside due diligence, not after it. Insurers price and scope these policies based on the buyer's own diligence — their review of the target company's finances, contracts, litigation history, and compliance record. We structured the diligence process and the resulting reports so they could go straight to the insurer's underwriters, avoiding a second, duplicate diligence exercise that would have added weeks and cost to the timeline.

4. Negotiated the share purchase agreement around the policy, not around an indemnity. The final agreement set the insurance policy as the buyer's sole recourse for breaches of the general representations, with only a small, separate indemnity surviving for a narrow set of fundamental matters — ownership of the shares, corporate authority to sell, and similar issues an insurer will not cover. That let Bohdan sign an agreement with no broad personal exposure and no escrow, while the fund secured a policy with a coverage limit of roughly $6,800,000, about ten percent of the purchase price.

5. Managed the retention like a real cost, not a footnote. Every W&I policy carries a retention — the buyer's own deductible before coverage responds — and this one sat around $680,000, roughly one percent of the deal value. We made sure the fund understood that figure going in as a real, budgeted cost of the deal structure, not fine print discovered after a claim.

The outcome

The deal closed on schedule at roughly $68,000,000. Bohdan received his proceeds in full at closing, with no holdback and no ongoing exposure beyond the narrow fundamental indemnity, which never came into play. He was able to step away from the business immediately, which had been the point of the deal for him from the start.

The insurance premium came in at roughly $200,000, paid by the fund as a closing cost, in exchange for the $6,800,000 coverage limit sitting above the $680,000 retention. About six months after closing, the fund's finance team found that a batch of accounts receivable the seller had represented as collectible turned out to be substantially uncollectible — a breach of one of the financial representations in the purchase agreement, worth a loss in the low six figures once past the retention. Because the policy, not Bohdan, was the buyer's remedy, the fund submitted a claim directly to the insurer. Bohdan was not contacted, was not asked to fund anything, and was not drawn back into a dispute over a business he no longer owned.

That claim was the clearest proof the structure had worked. The buyer got exactly the protection its investment committee required, the seller got exactly the clean exit he had insisted on, and neither side's post-closing relationship was strained by a dispute that, under the more conventional structure, would have run straight at the retired founder.

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