What are indemnities and why are they important when you sell a company?

An indemnity is a promise by one party to reimburse another, pound-for-pound, for a specific loss if it happens, rather than requiring proof the loss reduced the value of what was bought or agreed. You’ll meet indemnities most often in a Share Purchase Agreement when selling a company, but also in funding round documents and everyday commercial contracts.

Indemnities are common in all sorts of contracts, such as those covering property, supply of services, and insurance.

In this post, SeedLegals Head of Legal Anna Sivula explains the indemnities typically included in a Share Purchase Agreement, and how they protect buyers when you sell your company.

Contents

• What is an indemnity in a Share Purchase Agreement?
• How is an indemnity different from a warranty?
• What types of loss are covered by indemnities?
• Who typically gives indemnities in a Share Purchase Agreement?
• How are indemnities negotiated in a Share Purchase Agreement?
• How do I write an indemnity? What should a written indemnity include?
• Talk to the experts

If you’re getting ready to sell your business, you might have come across the term ‘indemnity’ in a Share Purchase Agreement. But what does it mean? And how does it work?

What is an indemnity in a Share Purchase Agreement?

An indemnity is a promise that you – as the seller – make to protect a buyer against certain types of losses, by agreeing to reimburse the buyer for these losses, pound-for pound.

The losses we’re talking about could be to do with, for example:

• tax issues
• unresolved litigation
• employment disputes
• infringement of intellectual property rights

… or something else. Each of these could have a significant impact on your company’s business and valuation.

Let’s say your company is being sued and the claim isn’t resolved before you complete the sale of your company. If the company loses the case and is required to pay damages to the other party, the buyer will usually expect to be reimbursed for the amount the company has to pay out.

This is where the indemnity comes in. In the Share Purchase Agreement, the buyer can include an indemnity which states that the seller agrees to reimburse the company and/or the buyer for any losses relating to the ongoing litigation.

How is an indemnity different from a warranty?

If you’re familiar with warranties – for example, in your contracts with investors – you might be thinking indemnities sound similar to warranties. Here’s how they differ.

For example: if your company is involved in a dispute that hasn’t been resolved when you complete the sale, the buyer might ask you to indemnify them against it. If the dispute later settles for £50,000, the indemnity means you reimburse the buyer that full £50,000 — regardless of whether the dispute affected the company’s value.

Warranties offer some protection but indemnities can be a more effective way to recover losses if there are specific issues that a buyer is particularly concerned about.

What types of loss are covered by indemnities?

Indemnities can cover a wide range of losses that might arise from issues that weren’t disclosed or couldn’t be identified during due diligence when you were negotiating with a buyer.

Tax issues are often dealt with in a separate tax indemnity covering the company’s potential tax liabilities before completion that might not come to light until afterwards. We explain this in more detail in our post: What is at tax indemnity?

Indemnities can also cover non-tax related issues such as unresolved litigation, employment disputes and/or infringement of intellectual property rights – each of which could be significantly detrimental to the company’s finances, reputation and valuation.

Who typically gives indemnities in a Share Purchase Agreement?

In a Share Purchase Agreement, it is typically the founders and/or directors of the target company who are asked to give indemnities. This is because they’re the people with the most knowledge of the company and its operations, and are therefore in the best position to identify and address any potential liabilities.

Investors (VCs in particular) are usually not willing to give indemnities because they’re typically not involved in the day-to-day management of the company.

How are indemnities negotiated in a Share Purchase Agreement?

Drafting indemnities in a Share Purchase Agreement can be complicated because it’s important to make sure the indemnity provisions are tailored to the specific risks of the transaction.

Typically, the buyer will carry out thorough due diligence on the target business, including investigating all possible claims and risks that the buyer might face after they close the deal. The indemnity provisions will be drafted to cover these risks and to provide the buyer with adequate protection.

Negotiating indemnities can involve a lot of back-and-forth between the buyer and seller. The seller will typically try to limit the scope of the indemnity, while the buyer will aim to broaden it to cover as much as possible.

How do I write an indemnity? What should a written indemnity include?

The provisions of an indemnity include details on the scope, such as the types of claims that are covered, the limitations on the amount of indemnity payable, and the time limits for making a claim.

The language used in indemnity provisions should be carefully reviewed to make sure it’s clear, unambiguous and identifies the specific liability for which the sellers are providing the indemnity.

As a seller, you’ll need to understand the potential risks to the buyer, including the likely value of the losses the buyer could suffer as a result. This will help you determine what you’re willing to indemnify and what limitations to include to protect you from liability.

FAQs

Is an indemnity the same as insurance?
 No — they’re related but different. Insurance is a policy from a third party (an insurer) that pays out if a specific event happens, in exchange for a premium. An indemnity is a direct promise between two contracting parties — no insurer involved, just one party agreeing to cover the other’s loss if it happens.

How long does an indemnity clause last?
 There’s no fixed rule — it’s negotiated as part of the contract. Most indemnities carry a time limit for the buyer to bring a claim, often 12–24 months after completion. Indemnities covering higher-risk issues, like tax liabilities, often run longer — sometimes several years — reflecting how long those problems can take to come to light.

Do indemnities appear in investment agreements, not just company sales?
 Yes. This article focuses on Share Purchase Agreements, but indemnities also appear in funding round documents. For example, an investor may ask the company to indemnify them against losses caused by inaccurate information given during the round. If you’re raising rather than selling, see our term sheet guide for where indemnities typically sit in that process.

What’s a common example of an indemnity in a startup context?
 A common one is a tax indemnity: if HMRC raises a tax bill relating to a period before a sale or investment, the seller or company agrees to reimburse that cost in full. Other frequent examples include indemnities covering unresolved litigation, misclassified employment status, or unresolved IP disputes uncovered during due diligence.

Talk to our specialists

Selling your company with SeedLegals? If you have any questions about indemnities or the Key Terms, ask your dedicated SeedLegals Exit expert or tap the live chat button (bottom right of this screen) to ask us. We’re always happy to help.