The buyer wants us to agree to a twenty percent indemnity cap on a sixty-million-dollar deal to cover potential breaches of representations and warranties. How do we negotiate them down to a market standard limit or transition this risk entirely to insurance?

Question

Tyler Smith · Accepted Answer

A twenty percent indemnity cap on a sixty-million-dollar deal is excessive and leaves you exposed to major post-closing liability. For a transaction of this size, you should transition the risk to a buy-side Reps and Warranties Insurance policy. This insurance protects the buyer while allowing you to walk away with minimal post-close exposure. When using this structure, you can negotiate your actual indemnity cap down to a survival basket of around one-half of one percent of the transaction value. The insurer will step in to cover any breaches beyond that limit, up to the policy limit. To make this work, you must address who pays the premium, which typically runs around three percent of the coverage limit. In a competitive seller's market, you can push this cost onto the buyer as a condition of exclusivity. Alternatively, you can agree to split the cost fifty-fifty to keep the deal moving forward. Make sure your legal counsel reviews the policy's exclusions to ensure there are no major gaps that could dump the liability back onto you. By shifting the burden to a third-party insurer, you protect your hard-earned wealth and prevent the buyer from using minor operational issues as an excuse to claw back your proceeds after the closing.