The buyer is demanding a high indemnification cap and a survival period of three years for general representations and warranties. How do we structure the basket and cap limits to prevent post-close legal liabilities from chipping away at our proceeds?

Question

Tyler Smith · Accepted Answer

Indemnification provisions are where buyers try to claw back your hard-earned transaction proceeds post-close. If you agree to a high cap and a long survival period, you are essentially leaving a portion of your purchase price at risk for years.

To protect your exit proceeds, you must negotiate a clear basket and cap structure.

- Establish a tipping or deductible basket of no more than one-half of one percent of the enterprise value. This prevents the buyer from nickel-and-diming you over minor post-close operational adjustments.
- Limit the general indemnification cap to ten percent or less of the total purchase price, and push the buyer to purchase Representation and Warranty Insurance (RWI) to cover any claims above this amount.
- Set the survival period for general representations to twelve or eighteen months, which aligns perfectly with one full audit or operating cycle.

By capping your liability and shortening the survival window, you can confidently transition out of the business without the constant threat of litigation. This clean break allows you to reallocate your capital immediately, rather than keeping massive cash reserves on hand to cover potential buyer claims.