How does a buyer's "indemnity basket" and "cap" structure affect our net proceeds at close, and how do we negotiate these thresholds to prevent the buyer from chipping away at our purchase price over minor post-close operational issues?

Question

Tyler Smith · Accepted Answer

The purchase price on the front page of your agreement is not what you keep if your indemnity terms are poorly structured. Buyers use the indemnity section to claw back cash after the deal closes by claiming breaches of representations and warranties. To protect your proceeds, you must negotiate a strong "basket" and a reasonable "cap" before signing. The basket acts like an insurance deductible. You want a "deductible basket" rather than a "first-dollar tipping basket." With a deductible basket, the buyer cannot claim any losses until the total value of their claims exceeds a certain threshold, and they can only recover the amount above that threshold. This prevents them from nickeling-and-diming you over minor operational discrepancies. Set the basket at one-half to one percent of the purchase price. The cap limits your total liability for standard representation breaches. You should push to cap this liability at ten to fifteen percent of the transaction value, rather than the entire purchase price. Limit the survival period of these representations to twelve to eighteen months, which aligns with one full audit cycle. Use a Business Integrity Review to identify any potential compliance or operational risks early, so you can disclose them on your disclosure schedules. Once a risk is disclosed, the buyer cannot sue you for it, protecting your net proceeds from post-close erosion.