At the most basic level, the purpose of compensation is to provide the parties to a transaction with a leaner means to answer the questions that arise after closing. In general, the compensation provisions deal with damages caused by damage caused by compensation, warranty and warranty. However, the purchaser will often want to broaden the scope of his compensation protection in order to correct losses that could result from certain debts found by the buyer during the hearing or due diligence and which would otherwise not be covered by the usual compensation in the event of a breach of representation and guarantees. Assuming that the sellers indicated that the company was not the subject of an ongoing public inquiry, with the exception of a specific ongoing investigation. If, after the closure, the government brought an action against the company on the basis of this investigation, the buyer would not have recourse against the sellers for a breach of the sellers` representation, as the sellers disclosed the investigation. If the buyer wishes to be compensated for the damages resulting from the disclosed investigation, it should include a specific compensation provision for this point. Sellers generally object to these « special » indemnifications because sellers believe that a transaction carries risks and that the buyer, as the new owner of the business, should assume these risks. Given this great flexibility to cover all claims for all related damages, one of the main objectives of compensation is to limit the scope, duration and dollar amount of its compensation obligations. Some of the most common mechanisms for such a restriction are explained below. Another aspect of the compensation provisions, which requires significant negotiations, is the way compensation is funded.
If a sales contract is silent, the buyer should act directly against individual sellers because of its prejudice. Buyers generally do not like this remedy, because there is no guarantee that sellers have the money to fulfill their compensation obligations after closing and going directly against the seller can be a lengthy lawsuit. In order to ensure that the buyer will be able to recover his damages in an effective manner over time, he will often negotiate in advance where the funds for identifiable claims come from. The three most common approaches to financing compensation are: (1) a receiver`s compensation account, (2) compensation for future payments and (3) withholding tax on the purchase price.