The buyer's draft of the purchase agreement includes an indemnification cap that is twenty percent of the enterprise value and a two-year general escrow. How do we negotiate these indemnity baskets and caps down to standard market rates without looking like we are hiding operational liabilities?

Question

Tyler Smith · Accepted Answer

The indemnification and escrow provisions in a purchase agreement represent the buyer's attempt to claw back some of the purchase price post-close to cover unexpected liabilities. A request for a twenty percent indemnification cap and a two-year escrow is overly aggressive and exceeds standard market terms. You must negotiate these numbers down to protect your walk-away cash. Start by gathering market data to show the buyer that their request is outside the norm. In modern transactions, general indemnification caps are typically limited to five to ten percent of the enterprise value, and escrow periods usually run for twelve to eighteen months. Position your counteroffer around these market standards, pointing out that your clean operational history does not justify an inflated risk premium. To further reduce your exposure, propose the use of representation and warranty insurance. Rep and warranty insurance shifts the majority of the indemnification risk from the seller to an insurance carrier. This allows you to negotiate a nominal indemnity cap, often as low as one percent of the deal value, and dramatically reduces or completely eliminates the need for an escrow account at close. Use your weekly Level 10 Meeting to review potential diligence disclosures with your legal counsel. By thoroughly disclosing all known issues in your disclosure schedules, you prevent the buyer from making future indemnity claims, keeping your exit proceeds fully protected in your bank account.