Ask auditors to prepare valuation report 

owner continues to be liable for acts done when he was in charge 

you can indemnify him for future liabilities 

buy out company with all it’s assets 

I can offer some general insights and considerations based on your questions:

1. Owner wants to retire and go abroad and settle with his family and hence he wants us to indemnify him

Considerations:

• Scope of Indemnification: Clearly define what the indemnification covers. Is it past liabilities, legal disputes, tax issues, undisclosed debts, or something else? The broader the scope, the higher your risk.

• Time Limit: Put a time limit on the indemnification period. It shouldn't be open-ended.

• Cap on Liability: Negotiate a maximum cap on the indemnification amount. This limits your potential exposure.

• Escrow Account: Consider placing a portion of the purchase price in an escrow account. This money can be used to cover any indemnified claims that arise post-acquisition. The funds would be released to the seller after a specified period if no claims are made.

• Seller's Representations and Warranties: Ensure the seller provides strong representations and warranties about the company's financial health, legal standing, and operational aspects. These form the basis for any indemnification claims.

• Due Diligence: Thorough due diligence is your primary protection. The more you uncover before the acquisition, the less likely you'll need to rely heavily on indemnification.

2. If we do a Business transfer and change empanelment in to new entity is it better or we buy out the company with all assets and business?

Considerations:

This is a critical decision with significant legal, tax, and operational implications.

• Asset Purchase (Business Transfer):

  • Pros: You cherry-pick the assets and liabilities you want. You can avoid inheriting unknown or contingent liabilities of the seller's old entity. Easier to integrate into your existing structure.

  • Cons: Re-empanelment with all PSU and private banks could be a lengthy, complex, and uncertain process. This is a major hurdle, as banking empanelment is crucial for this business. Contracts with existing clients might need to be re-negotiated or assigned, which could be challenging. Potential for business disruption during the transition.

• Share Purchase (Buy out the company with all assets and business):

  • Pros: The company's legal entity remains the same, which means existing bank empanelments, contracts, and licenses generally transfer seamlessly. This significantly reduces business disruption and re-empanelment risk.

  • Cons: You inherit all existing liabilities (known and unknown) of the target company. This is where robust due diligence and indemnification clauses become paramount.

Recommendation: Given the critical nature of banking empanelment, a share purchase is generally preferred in your scenario to ensure continuity of business and client relationships. However, this absolutely necessitates extremely thorough due diligence to uncover all potential liabilities, and strong indemnification clauses with financial safeguards (like escrow) to mitigate inherited risks.

3. Turn over is 6 cr. Profits around 1 cr Net worth on balance sheet is 3.5 cr.

These figures will be crucial inputs for the valuation.

4. What should be the approx valuation of this company?

Valuation is a complex process and depends on many factors. A "nominal value" as requested by the owner is subjective. Here are common valuation approaches you'd consider:

• Earnings Multiple (P/E or EV/EBITDA):

  • EBITDA: $6\text{ Cr turnover}\times 15\%\text{ EBITDA margin}=0.9\text{ Cr EBITDA}$.

  • Net Profit: Given as 1 Cr.

  • For IT/Fintech companies, EBITDA multiples can range widely, typically from 4x to 8x (or even higher for high-growth, unique companies). For a company with $0.9\text{ Cr EBITDA}$, a 4x multiple would be $3.6\text{ Cr}$, and an 8x multiple would be $7.2\text{ Cr}$.

  • For Net Profit of 1 Cr, a P/E multiple of 4-7x would suggest a valuation of $4\text{ Cr}\text{ to }7\text{ Cr}$.

  • Key Factors Influencing Multiples: Growth prospects, stability of client base (especially PSU banks), competitive landscape, proprietary technology, scalability, management team (post-owner exit), and overall market conditions.

• Discounted Cash Flow (DCF): This method projects future cash flows of the business and discounts them back to the present day. This is considered a more robust method but requires detailed financial projections.

• Asset-Based Valuation: Based on the Net Worth of $3.5\text{ Cr}$, but this is usually a floor for service-based businesses like IT/Fintech, as intangible assets (client relationships, intellectual property, brand) are often more valuable than tangible assets.

• Market Comps/Precedent Transactions: Looking at recent transactions of similar companies in the Fintech/RCA space, particularly those with banking sector clients, can provide benchmarks. This data can be hard to come by for private companies.

Approximation (Ballpark):

Given the turnover, profitability, and empanelment with PSU banks (which suggests stability and credibility), a valuation range of INR 4 Cr to INR 8 Cr seems plausible using earnings multiples as a starting point.

However, the "nominal value" aspect from the owner is key. If the owner is genuinely motivated by retirement and ease of exit, they might accept a lower multiple.

Factors that could push the valuation up:

• Strong, long-term relationships with PSU banks.

• Proprietary technology or unique service offerings in RCA/Fintech.

• High client retention rates.

• Scalability of the business without the owner.

Factors that could push the valuation down:

• Over-reliance on the owner for client relationships or operations.

• Lack of a clear second-tier management.

• Intense competition.

• Any significant contingent liabilities identified during due diligence.

5. If we give indemnification how do we protect our interest?

This loops back to the points mentioned in question 1. To protect your interest when providing indemnification:

• Thorough Due Diligence: This is your primary defense. Hire financial, legal, and operational experts to scrutinize every aspect of the company. Look for:

  • Undisclosed liabilities (loans, pending litigation, tax arrears).

  • Contractual obligations and potential breaches.

  • Employee-related issues.

  • Compliance with banking regulations (especially critical for RCA).

  • Quality of earnings analysis.

• Well-Drafted Indemnification Clause:

  • Specificity: Clearly define the types of losses covered.

  • Basket/De Minimis: A "basket" (a threshold amount) that claims must exceed before indemnification kicks in. A "de minimis" (individual claim minimum) that prevents numerous small claims.

  • Cap: A maximum amount the seller is liable for.

  • Survival Period: The length of time during which you can make a claim.

  • Exclusive Remedy: Whether indemnification is your only recourse for breaches of representations and warranties.

• Escrow Account: As mentioned, holding a portion of the purchase price in escrow for a specified period (e.g., 12-24 months) is a strong safeguard.

• Representations and Warranties Insurance (R&W Insurance): This is becoming increasingly common. You (the buyer) can purchase insurance that covers breaches of the seller's representations and warranties. This can reduce your reliance on the seller's financial capacity for indemnification. It also makes the deal more attractive to the seller as it limits their post-closing exposure.

• Seller's Financial Strength: Assess the seller's ability to actually pay out on an indemnification claim. If they are retiring and moving abroad, enforcing a claim might be difficult without upfront protection like an escrow.

• Post-Closing Covenants: Include clauses that require the seller's cooperation for a period after closing, especially for information requests related to past operations.

1. Please find out the real reason for his decision to settle abroad and for asking for your indemnity. You are legally liable for acts of omission and commission only after you take over that business.

2. It is a commercial decision, and not a legal one.

3.  and 4. You need to do a TEV study by engaging professionals (CAs, Cost Accountants) for the purpose. Lawyers are not qualified to evaluate any business commercially.

5. Please see my reply to Q. 1.

This is a commercial query which can be properly replied on the basis of various factors and calculations.

It is always advisable that you meet a professional with all the details and get a proper valuation. 

Indemnity to Retiring Owner:

If indemnity is sought, it must be clearly defined and time-bound. Limit your liability to specific risks (e.g., pending tax claims, regulatory issues, undisclosed liabilities) and cap the indemnity value. Include representations and warranties from the seller about the absence of debts, litigations, or regulatory non-compliance.

Business Transfer vs. Share Purchase:

Buying the entire company (share purchase) retains all empanelments and contracts but also carries risks of past liabilities. A business transfer/slump sale gives you a clean slate but may require fresh empanelments, risking business continuity. If empanelments are critical, share purchase with safeguards is preferable.

Financials: Turnover: ₹6–7 Cr, Net Profit: ₹1 Cr, Net Worth: ₹3.5 Cr

Valuation:

A reasonable valuation would be 4x to 5x EBITDA, i.e., approx. ₹6–7.5 Cr, subject to due diligence, client retention prospects, and contract continuity.

Protective Measures in Indemnification:

• Comprehensive due diligence (legal, tax, financial).
• Indemnity clause: define specific risks, time limits (3-5 years), and cap liability.
• Escrow arrangement or deferred payment linked to performance.
• W&I (Warranty & Indemnity) insurance for added protection.

Engage legal and financial advisors for structuring.

Pls connect for further help 😊

1. The owner of a private IT company wants to retire and is offering to transfer the business to you for a nominal value, contingent on including an indemnity clause in the agreement. This means you would take over the company while the owner shields themselves from future liabilities associated with the business through the indemnity clause. In that case you can indemnify only future liabilities and not before taking over the business. 

2. A nominal value is typically a very small amount, often symbolic, signifying the transfer of ownership. This implies the owner is not seeking significant financial gain from the sale but rather wants to exit the business without incurring further legal or financial risk. However you can buy out the company with its assets in the negotiated amount, the value of which can be arrived in consultation with an auditor.

3.  Your own auditor will be the best person to assess the cost and other terms for negotiations.

4.  It's absolutely crucial to conduct thorough due diligence on the company's financial health, legal standing, and operational status before agreeing to take over. This includes reviewing contracts, financial statements, and any pending or potential legal issues. 

5. This clause, a critical part of the agreement, legally protects the owner from future liabilities related to the company's past actions, debts, or legal issues. If any such issues arise after the transfer, the owner is indemnified (compensated) for the losses or damages by the new owner (you). The duration of the indemnity, cap on indemnity and scope of indemnity are to be analysed before indemnifying the owner. Seek legal counsel to review the indemnity clause and ensure it protects your interests.

1. The seller wants indemnity because he plans to retire and move abroad. You should only agree after doing proper due diligence, including legal, financial, tax, and HR checks. To protect yourself, make the indemnity time-bound and capped. You can also hold back a part of the payment for 12 to 24 months in an escrow or ask for a personal guarantee.

2. If you do a business transfer, you get a clean structure and avoid old liabilities, but you may need to reapply for bank empanelments. If you buy the whole company by purchasing shares, the empanelments stay, but you take on all risks, known and unknown. You can go for a full company buyout only if the due diligence is clean and you get proper safeguards like price adjustments and indemnity.

3. The company’s numbers are simple. It has 6 to 7 crore turnover, about 1 crore in net profit, and 3.5 crore net worth. The EBITDA margin is around 15 percent.

4. Based on common methods, the company could be valued at 3 to 5 times EBITDA, which means about 3 to 5 crore. Or about 0.8 to 1.2 times revenue, which gives a range of 5 to 7 crore. But since the owner is retiring and wants to close quickly, you can negotiate for 2.5 to 3.5 crore, maybe with some part linked to future performance.

5. If you agree to indemnify him, protect yourself by keeping some payment on hold for 1 to 2 years. Make sure the agreement clearly covers warranties about taxes, legal cases, IP rights, and all past activities. Also, get a non-compete clause for 3 to 5 years and ask for an indemnity from his side too. Before finalizing anything, get a CA or lawyer to do a detailed due diligence.

1. Owner wants indemnity as he plans to retire and settle abroad. What should we do?

Yes, this is a common request during buyouts, but it carries legal and financial risks for the buyer.

 You should not give open ended or blanket indemnity. Instead:

• Indemnify only for post transfer operations, not for prior actions.

• Insist on a reverse indemnity clause, where:

  • The current owner indemnifies your company for any liabilities, penalties, tax dues, or litigation arising out of operations before the takeover date.

• Include representations and warranties clause stating:

  • No undisclosed liabilities or pending legal/tax issues.

  • All statutory compliances are up to date.

 Suggestion: Make indemnity time-bound (e.g., valid for 3–5 years) and amount-capped (e.g., up to ₹50 lakhs or 20% of deal value).

2. Is it better to do a Business Transfer Agreement (BTA) or Share Purchase (Buy Company)?

Each has pros and cons:

Option A Business Transfer Agreement (Asset Sale)

Pros:

• Cleaner. You only buy selected assets, clients, empanelments.

• No past liabilities transfer.

• Can transfer key contracts (with consent of PSU banks).

Cons:

• May lose some empanelment rights, licenses, or regulatory permissions unless revalidated.

• GST and stamp duty may apply on asset transfer.

Option B Share Purchase (Buy 100% equity of the company)

Pros:

• All empanelments, licenses, contracts, and employees remain intact.

• Easier transition for PSU/private banks.

Cons:

• You inherit all past liabilities, legal risks, or hidden tax demands unless protected via due diligence & indemnity.

Recommendation:
If liabilities and records are clean after due diligence, prefer Share Purchase with strong SPA + indemnity protections.

Otherwise, go for Business Transfer Agreement with fresh empanelment.

3. Company Profile: ₹6–7 Cr Turnover | ₹1 Cr PAT | ₹3.5 Cr Net Worth

This appears to be a stable, low-debt business with steady margins (~15% EBIDTA) and goodwill among banks.

4. Approximate Valuation of the Company?

A few common methods:

A. EBITDA Multiple

Market range: 4× to 7× EBITDA (₹90L–₹1 Cr)
→ Valuation: ₹4 Cr – ₹7 Cr

B. Net Asset Value (Book Value)

Net Worth = ₹3.5 Cr

C. Revenue Multiple (Rarely used alone)

Revenue × 1× (Fintech is a high-growth industry)
→ ₹6 Cr approx

Likely Fair Valuation Range: ₹4.5 Cr – ₹6 Cr
(based on combination of EBITDA and Net Assets)

If the owner is offering at a “nominal” price (say ₹2–3 Cr), and subject to clean records, it’s a good strategic deal.

5. How Do We Protect Ourselves While Giving Indemnity?

 Key Legal Protections to Include in SPA/BTA:

1. Full Due Diligence – Financial, Tax, Regulatory, Employee, Legal

2. Detailed Representations & Warranties by Seller

3. Indemnity Clause:

   • Covers liabilities arising before cutoff date

   • Time-bound (3–5 years)

   • Financial cap (20–30% of deal value)

4. Holdback or Escrow Clause – Keep a portion (e.g. 10–20%) of consideration in escrow for 1–2 years

5. Non-Compete Clause – Prevents seller from re-entering business

6. Exit Clauses – If any key empanelments or licenses not transferred, deal can be revisited

• Indemnity: Accept only with limited scope (e.g., tax/legal claims), backed by escrow or retention money.

• Business Transfer vs Share Purchase:

  • Business Transfer = safer, but re-empanelment needed.

  • Share Purchase = smoother continuity, but more risk.
    Choose based on empanelment transfer ease.

• Valuation: ₹3.5–5 Cr based on ₹1 Cr profit and ₹3.5 Cr net worth.

• Protect Yourself:

  • Use strong SPA with reps/warranties

  • Keep escrow/holdback for 12–18 months

  • Conduct full due diligence

You are evaluating the takeover of a Fintech/RCA company with existing empanelments in PSU and private banks, a turnover of ₹6–7 crores, and an EBITDA of 15%. The owner is retiring and wants to exit the business by offering it at a nominal value, while also seeking an indemnity from your end.

If you agree to indemnify the owner, you must define its scope precisely. This indemnity should be limited to specific known liabilities and contingent risks disclosed during due diligence. You should impose a time limit (typically 3 to 5 years) and a monetary cap on the indemnity. To further protect your position, you should retain a portion of the consideration in escrow to cover any future claims.

Between acquiring the company via share purchase and conducting a business transfer, the choice depends on your priorities. If you want to preserve all bank empanelments and contracts without fresh approvals, a share purchase offers better continuity. However, it carries the risk of inheriting undisclosed liabilities. If you prefer a clean structure free of past liabilities, a business transfer (structured as a slump sale) is safer, though it requires fresh empanelments and novation of contracts. Given the sector and reliance on banking relationships, a share acquisition may offer a practical advantage—subject to thorough legal, financial, and tax due diligence.

Based on the financials shared—₹6–7 crore turnover, ₹1 crore net profit, and ₹3.5 crore net worth—the approximate valuation of the company could range between ₹4.5 to ₹6 crore, applying a 5–6x EBITDA multiple. The valuation must be fine-tuned based on customer stickiness, contracts, pending liabilities, IP assets, and staff strength.

To safeguard your interests when offering indemnity, you should incorporate detailed representations and warranties in the agreement, along with disclosure schedules listing all liabilities, contracts, and pending litigation. The agreement must also include a non-compete clause binding the seller from re-entering the fintech sector for a reasonable period. Introducing an escrow arrangement or a deferred consideration structure will ensure a fallback in case of any post-sale disputes or breaches.

I recommend conducting comprehensive due diligence across legal, financial, tax, and operational aspects. Once satisfied, you should proceed with a well-drafted Share Purchase Agreement (SPA) or Business Transfer Agreement (BTA), tailored to secure your long-term commercial and legal interests.

You may contact me for end-to-end legal support in conducting due diligence, drafting transactional documents, negotiating terms, and ensuring regulatory compliance throughout the acquisition process.

Yes is the answer for all questions. Valuation can’t be certain. Yes you can indemnify

Dear Client,

• Owner wants to retire and go abroad and settle with his family and hence he wants us to indemnify him If we do a Business transfer and change empanelment in to new entity is it better or we buy out the company with all assets and business?

  Considering the fact that the seller wants to be indemnified, a business transfer is much safer option than a buying out the company. This move will allow you to acquire only the assets of the company including the client contracts. However, the latter option would be more practical if the empanelment with PSU and Private banks are non-transferable.

• If we do a business transfer and change empanelment in to new entity is it better or buy out the company with all assets and business ?

Yes! This is absolutely recommendable provided the empanelments are non-transferable or require a fresh registration.

I hope this answer helps. In case of future queries, please feel free to contact us. Thank you.