The Middle Ground

A GUIDE TO DEAL TERMS IN PLAIN ENGLISH


+ Introduction

+ Purchase and Sale

+ Closing

+ Representations & Warranties - Seller

+ Representations & Warranties - Buyer

+ Covenants

+ Conditions to Closing

+ Indemnification

+ Termination

+ Miscellaneous

Tax Treatment of Indemnification Payments


Classification: Under the Radar
Section: Indemnification
Negotiation Time: Minimal
Transaction Costs: Insignificant
Major Impact: Deal Value


What is This? The parties use this section to address how indemnification payments will be treated for tax purposes.

The Middle Ground: This provision states that indemnification payments made under the Agreement are to be treated as an adjustment to the Purchase Price for tax purposes, so long as such treatment is allowed by law.

Purpose: This is a technical term that allows the Indemnified Party to avoid paying tax on indemnification payments. It provides a benefit to one party without harming the other, and either party could be in the beneficial position at some point, so neither side will object to its inclusion and it likely won’t even be explicitly discussed.

Buyer Preference: None.

Seller Preference: None.

Differences in a Stock Sale Transaction Structure: None.


DISCUSSION

We want The Middle Ground to be an ongoing dialogue for and resource to the lower middle market M&A community. The outline above is generally applicable, but there is always specific case law and nuance around certain industries that can be useful in helping buyers and sellers come together. If you are a lawyer or deal professional, we encourage you to add your perspective below.