Indemnification: When a business owner sells a business to a new buyer, the seller makes a host of representations about the condition of the business and then provides an indemnification or guarantee that the representations are accurate.
The indemnification may take a variety of forms. Typically, an insignificant amount of damage occuring to the buyer based on errors in the representations is considered normal and the sellers provide no compensation for such de minimus claims. At the other end of the extreme, the seller's liability is typically capped at some level (rarely equal to the proceeds, but it can approach that threshold).
For example, if following the sale of the business in which the seller represented that no employee claims were outstanding or threatened for actions of management prior to the sale, an employee makes a claim for $10,000 for vacation pay that was not previously paid but should have been, the buyer would typically have to make that payment.
On the other hand, if an employee were to make a multi-million dollar claim for sexual harrassment, the seller would typically be called upon to solve the problem for the buyer, up to a limit.
Of course, this assumes that the buyer has purchased the seller's share's in the corporation and not merely the assets from the business. If the assets are purchased, the liabilities not expressly assumed by the buyer are retained by the seller.
You may also want to read my post about "tipping baskets."
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