Even though it may not translate into dollars immediately, indemnifications have realizable value. Indemnification can control risk exposure and, if a mishap arises in the future, allow the parties to deal with it more efficiently. Additionally, indemnification can also be used by as bargaining chip in contract negotiations.
Take, for example, two parties with a history of doing business who are negotiating a supply contract. Party A is the supplier and Party B is the distributor, and Party B currently has an outstanding debt with Party A. The product that is subject of their contract is a consumer good that carries with it some degree of third-party risk in that there is the potential for consumers to be harmed by it and thus put liability on the parties to the contract. Party A demands that Party B indemnify it from any such third-party claims, taking on all the risk. Party B, being a small distributor, does not like the idea of taking on such a high degree of potential risk, but also relies on Party A for a significant portion of its inventory. Here, Party B can, through some research, establish a price for such an indemnification and then offer to take on the extra risk in exchange for a reduction in the debt owed.
Indemnification is a powerful tool for transforming asset risk into deal risk, and then reasonably apportioning it between the parties involved in the deal. Small businesses should seek out opportunities to use indemnification, as well as other risk allocation tools, to create more balanced and valuable deals by decreasing risk and increasing profitability.