An indemnity is a seller promise in a purchase agreement to compensate the buyer for specific defined losses after close, such as an inherited licensing claim.
What is indemnity? An indemnity is a contractual promise by the seller to reimburse the buyer for particular losses that arise after a deal closes. Where a representation gives a general claim if a statement is false, an indemnity targets a named risk directly, so the buyer recovers a defined loss without having to prove a breach in the same way. In software M&A a specific indemnity is the cleanest protection against a known or suspected licensing exposure, because it ties the seller to the exact cost to cure.
When diligence finds a licensing shortfall or an indirect access risk, a buyer does not want to rely only on a general warranty that may be heavily qualified. A specific indemnity names the risk, for example an identified Oracle or SAP exposure, and commits the seller to cover the loss if it materialises. This is the difference between hoping a warranty holds and having a direct contractual path to the cost to cure. For inherited audit risk, which often surfaces only after close, a tailored indemnity is frequently the most effective protection a buyer can secure.
Indemnities carry limits that a buyer must read carefully. A cap sets the maximum recoverable, a basket or threshold sets the minimum before a claim can be made, and a survival period sets how long the protection lasts. General indemnities are usually capped and time limited, while specific indemnities for identified risks can be uncapped or carved out of the general limits. For a licensing exposure that could take a year or two to surface as an audit, the survival period is as important as the cap.
An indemnity is a promise, so its value depends on the seller still being able to pay. That is why indemnities are often backed by an escrow holdback, which sets cash aside to satisfy a claim. The combination of a sized indemnity and a funded holdback is the standard way to protect against inherited licensing risk. This work is commercial and licensing advisory, not legal advice.
| Term | What it sets | Buyer concern |
|---|---|---|
| Cap | Maximum recoverable | Must cover the cost to cure |
| Basket or threshold | Minimum before claiming | Should not exclude real loss |
| Survival period | How long protection lasts | Must outlast audit risk window |
| Specific indemnity | Cover for a named risk | Best for known exposure |
Related reading: see the M&A software glossary hub, plus escrow holdback and representations and warranties.
Map and quantify the licensing exposure in your target or portfolio before it becomes a post close audit. Independent, buyer side, paid only by the acquirer.
Talk to a software M&A advisor