What Does Sandbagging Mean?
Sandbagging is a clause in a purchase and sale agreement that gives the buyer the right to make an indemnity claim after closing for an inaccurate fact that a buyer knew was false when signing the document, despite not informing the seller prior to closing.
While sandbagging is not a common act for most buyers, sellers must be aware of the possibility that this clause may be inserted into the agreement. This is why it is critical to conduct due diligence on a buyer, as it can eliminate buyers who use these tactics to gain unfair advantages.
Divestopedia Explains Sandbagging
The sale of a business is a complicated process for any seller. The seller is expected to provide the most accurate information possible, which the seller relies on to determine the purchase price. This information is generally enumerated in the seller's reps and warranties. The problem is that the seller can often miss key information, or simply not be aware of everything that needs to be disclosed. If a seller makes an error or omission in the reps and warranties, the buyer can make an indemnity claim after the deal has closed.
In most cases, the buyer's lawyer prepares the first draft of the purchase and sale agreement, so the seller must be on the lookout for language that skews the agreement in the seller's favor. The seller's lawyer must watch for the insertion of a sandbagging clause, which essentially sets the stage for the buyer to deliver the indemnity claim, even if the seller knows of omitted information or misrepresentations prior to the closing date.