The buyer's draft of the purchase agreement includes a first-dollar indemnity basket that allows them to claw back funds for every minor operational issue post-close. How do we structure a deductible basket and liability caps to insulate our post-closing proceeds?

Question

Tyler Smith · Accepted Answer

A first-dollar indemnity basket is a major risk for a selling owner. Under this structure, once the buyer's accumulated post-closing claims exceed a small threshold, they can claw back funds starting from the very first dollar of those claims. This allows them to nickel-and-dime you over minor, everyday operational adjustments, effectively chipping away at your realized purchase price.

You must negotiate a true deductible basket and clear liability caps to protect your proceeds.

- Insist on a deductible basket, often called a tipping basket or true deductible, where the buyer can only recover damages that exceed the threshold, and you are only liable for the excess amount, not the initial basket value.
- Set the basket size at a standard market rate, typically one-half to one percent of the total enterprise value.
- Limit your overall indemnity exposure by negotiating a tight liability cap, typically capped at five to ten percent of the purchase price for general representations and warranties.

To secure these terms, you need to prove your operational records are impeccable. Show the buyer that your core business risks are systematically identified and resolved through your weekly Level 10 Meeting™ and structured IDS® process. Proving your operational house is in order gives you the leverage to demand market-standard indemnity protections that keep your cash in your bank account.