Our transaction size is too small for a standard Reps and Warranties Insurance policy, but the buyer is still demanding a twenty percent general indemnity cap. How do we negotiate a tiered basket and cap structure that protects us from post-closing clawbacks without destroying our proceeds?

Question

Tyler Smith · Accepted Answer

For lower-mid-market transactions where Reps and Warranties Insurance premiums are economically unfeasible, you must negotiate a highly structured indemnification framework in your purchase agreement to protect your exit proceeds from post-closing clawbacks.

Start by demanding a tipping basket or a deductible basket rather than a first-dollar recovery structure. A deductible basket acts like an insurance deductible, meaning the buyer cannot seek indemnification until their actual losses exceed a specific threshold, typically one-half to one percent of the transaction value. Once that threshold is crossed, you are only liable for the excess amount.

Next, negotiate a strict general indemnity cap. While buyers often push for twenty percent, the market standard for uninsured private transactions typically ranges between ten and fifteen percent of the purchase price. Link this cap directly to your seller note, specifying that any valid indemnification claims must first be offset against the outstanding principal of the seller note rather than requiring you to write a check.

Finally, limit the survival period for general representations and warranties to twelve or eighteen months. This ensures that once the buyer completes their first full annual audit cycle post-closing, your liability terminates, securing your hard-earned wealth.