Definition
Indemnification is a contractual promise where a seller agrees to cover the buyer for financial losses that arise from issues existing before the sale closed. Think of it as a specialized insurance policy for the transaction, protecting the new owner from historical problems like billing errors, compliance violations, or undisclosed liabilities.
In a practice sale, you, the seller, make certain promises about the state of your practice. These are called representations and warranties. If one of these promises turns out to be untrue after the sale and costs the new owner money, your indemnification promise requires you to cover that cost, usually from funds held in an indemnification escrow.
An easy way to understand this is to compare it to medical malpractice “tail” coverage. Tail coverage protects you from claims made after you leave a practice for care you provided while you were there. Indemnification protects the new owner of your practice from business issues (like a government audit or a HIPAA fine) that stem from the time when you were the owner.
Why This Matters to Healthcare Providers
This is one of the most negotiated parts of a sale agreement and directly impacts your financial risk and final take-home proceeds. A buyer uses indemnification to protect themselves from inheriting costly problems related to your practice’s past billing, referral relationships, or data security. How this section is structured determines how much of the sale price is held back and for so long you remain financially responsible for past operations.
Example in Healthcare M&A
Scenario: A private equity firm acquires a multi-physician urology group. As part of the deal, the selling physicians represent that the practice has been fully compliant with all billing regulations. A portion of the purchase price, 15%, is placed into an escrow account to back this and other promises.
Application: Eight months after the sale, a Medicare audit identifies a pattern of incorrect modifier usage from the previous two years. This results in a demand for a $400,000 repayment, plus penalties. The new owner files an indemnification claim against the selling physicians.
Outcome: Because the loss resulted from a breach of the seller’s representation about billing compliance, the claim is valid. The $400,000 repayment is paid to the government directly from the escrow account, reducing the final amount the selling physicians receive. This protects the buyer from a financial problem they did not create.
Related Terms
- Representations and Warranties – The specific factual statements you make about your practice during a sale. A false representation is what typically triggers an indemnification claim.
- Indemnification Escrows – The “security deposit” for your promises. This is a portion of the purchase price held by a third party for a set period to cover any future claims.
- Due Diligence – The buyer’s investigation into your practice’s finances, operations, and compliance. Indemnification serves as the backstop for any risks that this process does not uncover.
The due diligence process is where many practice sales encounter unexpected challenges. View our Transaction Support Services →
About the SovDoc M&A Glossary
Hand-curated by our deal-makers and analysts, the SovDoc glossary turns complex mergers-and-acquisitions jargon into clear, plain-English definitions.
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Frequently Asked Questions
What is indemnification in the context of a practice sale?
Indemnification is a contractual promise where the seller agrees to cover the buyer for financial losses arising from issues that existed before the sale closed. It acts like a specialized insurance policy protecting the new owner from historical problems such as billing errors, compliance violations, or undisclosed liabilities.
How does indemnification protect the buyer in a healthcare practice sale?
Indemnification protects the buyer by ensuring the seller covers costs resulting from breaches in representations and warranties, like compliance failures or billing mistakes, discovered after the sale. Typically, funds are held in an indemnification escrow to cover these losses, safeguarding the buyer from inheriting financial problems created before their ownership.
What is an example of indemnification in a healthcare merger or acquisition?
In one example, a private equity firm buys a urology group and the sellers promise full billing compliance. After the sale, a Medicare audit finds errors requiring a $400,000 repayment. The new owner claims indemnification, and this amount is paid from escrow, protecting the buyer from the seller’s prior billing mistakes.
Why is indemnification a critical part of a healthcare practice sale agreement?
Indemnification is heavily negotiated because it directly affects the seller’s financial risk and final proceeds. It determines how much of the sale price is withheld, how long the seller remains responsible for past practices, and ultimately controls protection against inheriting costly legacy issues related to billing, referrals, or data security.
How does indemnification relate to representations and warranties?
Representations and warranties are factual promises made by the seller about the practice during a sale. Indemnification promises that if these representations are false and cause losses to the buyer, the seller will cover these costs, often using funds from an indemnification escrow. This link makes indemnification the remedy when representations prove untrue.