We are negotiating the indemnification provisions in the purchase agreement, and the buyer wants a ten percent indemnity cap with a fifteen-month survival period. How do we structure these limits to prevent the buyer from clawing back our cash?

Question

Tyler Smith · Accepted Answer

Indemnification provisions dictate how much of your purchase price you have to give back if the buyer discovers a breach of your representations and warranties after close. Buyers typically secure this by placing a portion of the purchase price in a third-party escrow account. You must negotiate both a basket and a cap. The basket is a deductible that prevents the buyer from bringing small, nuisance claims. It should be a tipping basket, meaning they cannot claim anything until the total damages exceed a certain threshold, typically one half of one percent of the enterprise value. The cap should limit your total liability to no more than ten percent of the purchase price, and the survival period should be limited to twelve to eighteen months. For larger transactions, urge the buyer to purchase Representations and Warranties Insurance instead of relying on a large seller escrow. This allows you to walk away with nearly all your cash at close. By capping your exposure, you protect your exit proceeds from being slowly drained by post-close disputes.