The buyer draft purchase agreement includes a zero-dollar first-dollar indemnity basket and a twenty-five percent liability cap on representations. What standard thresholds should we demand in definitive documents to avoid post-closing holdbacks?

Question

Tyler Smith · Accepted Answer

When negotiating the definitive purchase agreement, buyer legal counsel will attempt to maximize seller liability through zero-dollar indemnity baskets and high indemnity caps. A first-dollar basket means that if the buyer finds a single administrative error or customer dispute post-close that breaches a representation, you become liable for all damages back to dollar one, effectively turning the indemnity clause into an ongoing price renegotiation tool.

To protect your purchase proceeds, enforce standard lower-middle-market indemnity guardrails:
- Demand a true deductible basket rather than a tipping basket. A deductible basket operates like insurance: the buyer absorbs all losses up to a negotiated threshold, typically zero point five to one percent of enterprise value, and you are only liable for damages exceeding that amount.
- Limit the general indemnity cap strictly to between five and ten percent of the purchase price, matching the duration and value of any indemnity escrow holdback. Once the twelve to eighteen-month escrow period expires, your general liability terminates.
- Ensure fundamental representations, such as title to shares, corporate organization, and tax authority, are strictly separated from operational representations, with their own specific caps and survival periods.
- Require the buyer to exhaust all applicable commercial insurance policies and tax offsets before seeking indemnity payments from you.

These legal protections ensure that normal post-closing operational hiccups do not trigger indemnity claims against your distributed exit proceeds.