The buyer's LOI includes a broad indemnity basket with a survival period of three years, but we want to cap our post-closing exposure. How do we structure a fundamental representations survival limit and deductibles to prevent the buyer from clawing back our sales proceeds?

Question

Tyler Smith · Accepted Answer

Buyers use post closing indemnity claims to claw back purchase price under the guise of undisclosed liabilities. To protect your proceeds, you must limit your exposure in the definitive agreement. Negotiate for two separate tiers of representations and warranties. General representations, which cover standard operational matters like customer contracts and equipment conditions, should have a short survival period of twelve to eighteen months and be capped at ten to fifteen percent of the purchase price. Fundamental representations, which cover ownership of the company shares, tax compliance, and organization, can survive longer, but should still be capped at the total transaction value. Insist on a true indemnity basket rather than a tipping basket. With a deductible basket, you are only liable for damages that exceed a set threshold, and only for the excess amount. With a tipping basket, once the threshold is crossed, you become liable for every dollar from zero, which invites minor disputes. Align these parameters with your financial risks. You can also purchase representation and warranty insurance to shift the risk of breach from your personal balance sheet to an underwriting firm. This insurance allows you to negotiate lower caps and shorter survival periods, ensuring that once you close the deal, your cash remains yours.