The buyer is proposing a basket and cap structure for indemnity claims that feels highly lopsided, especially regarding representations about our proprietary intellectual property. How do we limit our exposure and structure these baskets so we do not end up self-insuring the buyer's post-acquisition mistakes?

Question

Tyler Smith · Accepted Answer

Buyers use broad indemnity terms and low liability caps to transfer post-closing business risks back to the seller. If you are not careful, you could end up paying for their post-acquisition operational mistakes under the guise of breach of representations.

First, establish a clear distinction between general representations and fundamental representations. General representations, such as standard operational and employee matters, should have a liability cap limited to ten percent or less of the purchase price, with a survival period of twelve to eighteen months. Fundamental representations, such as ownership of the company and tax compliance, can have higher caps, but they must be strictly defined.

Second, negotiate a deduct-first basket rather than a first-dollar tipping basket. With a deduct-first basket, the buyer cannot make a claim until their total losses exceed a specific threshold, and they can only recover losses above that threshold. This prevents them from nickel-and-diming you over minor, everyday operational issues.

Third, use your weekly Level 10 Meetings to review and clean up any potential compliance or intellectual property risks before you sign the LOI.

My recommendation is to insist on buy-side Representation and Warranty Insurance, or RWI. By requiring the buyer to purchase an RWI policy, you can cap your personal indemnity liability at a fraction of a percent of the deal size. This moves the risk of post-close disputes off your plate and onto an insurance company, allowing you to walk away with peace of mind.