Definition - What does Buyer Indemnity mean?
A buyer indemnity is a clause included in the purchase and sale agreement (PSA), which relates to the reps and warranties provided by the buyer. It is often a clause buried toward the end of the PSA, but nonetheless an important component of the agreement for the seller. It basically releases the seller from any liability that may arise due to the buyer's failure to provide true and accurate reps and warranties.
Divestopedia explains Buyer Indemnity
Buyer indemnities, like seller indemnities, are difficult to exercise. Everyone loses when a rep and warranty is found to be untrue, since exercising indemnities usually entails a legal process that is costly to both parties.
Sellers will usually look for buyers to indemnify them from losses arising from any breach of the representations, warranties, covenants or agreements made by the buyer at the time of the transaction.
What does this mean for the seller? An example of a buyer representation may be that the financial statements used to value the consideration shares provided as part of the deal are true and accurate. If after the transaction, the buyer's auditor revises these financial statements, this buyer's representation would be untrue and could mean that the consideration shares received by the seller have a different value. The seller would then potentially act on the buyer indemnity provided to protect him/herself from the resulting loss.
When Selling Your Business, What Sale Process Is Best?
Join thousands of others with our weekly newsletter