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By Holly A. Magister, CPA, CFP®

The “indemnification basket” is one of the most important deal terms found in the Letter of Intent and ultimately in the Purchase Agreement and is often misunderstood by both the buyer and seller of a business.  Knowing the specific way a basket works, as negotiated and defined in a purchase agreement, will prevent you from leaving “Money on the Table” when it's time to sell a business.

If you are the business owner selling your business, this term should be negotiated when the Letter of Intent (LOI) is contemplated.  Subsequent to the buyer’s due diligence and as you get close to the finalization of the deal, it becomes much more difficult to keep the basket as a layer of protection, unless it has been negotiated in the LOI.

And if you are the party buying a business, it is a good idea to keep the basket as low as possible and not part of the Letter of Intent (LOI) so you have something to negotiate with later in the acquisition process.

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By Edwin I. Grinberg, Esq. President, Lionshead Financial Planning Company

The Problem:

Are you a corporate business owner who has spent long hours growing your business?  Is the business either the largest or one of the largest assets you own?   Do you co-own the corporation with other shareholder(s)?  Are you concerned that your heirs would not be interested in or able to run the business in the event of your death or disability?   Do you have a ready, willing and able buyer for your stock interest? What are possible purchase agreements? Let's take a look at a potential exit strategy.

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By Edwin I. Grinberg, Esq. President, Lionshead Financial Planning Company

The Problem:

Consider the following example.  Steve and Roger each own 50% of the shares of Acme Software Development Corp.  The business has been fairly successful and is worth $5,000,000.  Each owner takes home annual salary and bonuses of several hundred thousand dollars.  As is the case with many closely held corporations, Acme has never paid out any dividends to either stockholder.  As is also the case with many closely held business owners, Steve and Roger were so busy with the business that they never created or updated their estate plan and had an exit strategy in place to deal with the continuation of the business after the death of one of the stockholders.  Returning home from a business meeting, Roger was instantly killed in an automobile accident.  Steve faces his partner’s premature death. What happens next?  What should have happened?

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