What is Indemnification Cap?
The Short Answer
Indemnification Cap explained simply
When you sell a business, you make promises about its condition and finances. If these promises turn out to be false, or if other problems come up after the sale, you might have to pay the buyer back. An indemnification cap puts a ceiling on how much you, as the seller, would have to pay in such situations. It protects you from unlimited financial risk after the deal closes.
Real-World Example
The Software Company Sale
Imagine you sell your software company for $5 million. The sale agreement includes an indemnification cap of $500,000. A year later, a lawsuit arises from a product sold before the sale, costing the buyer $700,000. Because of the cap, you only have to pay the buyer $500,000, even though the actual damages were higher.
Why this matters
This cap is important because it limits your financial risk after selling your business. Without it, you could be on the hook for unlimited costs if problems arise later. It gives you peace of mind and a clear understanding of your maximum exposure.
Always negotiate a clear indemnification cap in your sale agreement. It protects your post-sale finances and helps you move on with confidence.
Always negotiate a clear indemnification cap in your sale agreement. It protects your post-sale finances and helps you move on with confidence.
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