The buyer wants a broad indemnity basket with a first-dollar deductible instead of a true deductible or tipping basket. How do we structure the basket and cap to limit our post-close exposure on minor representation breaches?

Question

Tyler Smith · Accepted Answer

An indemnity basket acts like an insurance deductible, preventing the buyer from clawing back the purchase price over minor, immaterial representation breaches. However, if the buyer inserts a first-dollar deductible, also known as a tipping basket, the moment their cumulative claims exceed the threshold, they can claw back the entire amount from dollar one.

You must reject this structure and negotiate for a true deductible. With a true deductible, you are only liable for the amount that exceeds the threshold, protecting you from paying for those initial minor claims.

Additionally, you must set the basket size at a fair market rate, typically one-half to one percent of the total enterprise value.

You must also negotiate a hard cap on your overall indemnity liability, limiting it to no more than ten percent of the purchase price, and secure a survival period of no more than twelve to eighteen months for general representations.

To enforce this, run your business with high operational discipline before the sale. Use your Level 10 Meetings to identify and resolve potential compliance or operational issues early. By maintaining a clean, well-documented track record, you reduce the buyer's risk and gain the leverage needed to secure a clean, true deductible structure.