The buyer's purchase agreement draft requires a broad indemnification basket of one percent of the transaction value and a cap of twenty percent. How do we negotiate these limits down to market standards to protect our proceeds after closing?

Question

Tyler Smith · Accepted Answer

Indemnification terms are where buyers quietly claw back the purchase price after the deal closes. A twenty percent cap is aggressively high in the current market, and a broad basket means you could be on the hook for minor operational issues immediately. You must push back hard on these terms.

First, demand a true deductible basket rather than a first-dollar tipping basket. With a deductible basket, you only owe money if indemnification claims exceed the threshold, and you are only liable for the amount above that threshold. Set this basket at one-half of one percent of the purchase price, which is standard for mid-market deals.

Second, push the indemnity cap down to ten percent or lower. Frame this negotiation around the strength of your operational processes. Show the buyer that your business is run systematically using the EOS® model. Prove that your leadership team runs weekly Level 10 Meeting™ sessions to resolve issues, meaning there are no hidden skeletons or unrecorded operational liabilities.

If the buyer remains highly risk-averse, introduce representation and warranty insurance to the deal. This insurance transfers the risk of breaches from you to a third-party insurer, allowing you to reduce your indemnity cap to a nominal amount, often just one percent of the deal size. This ensures you walk away from the closing table with your cash proceeds secured.