The buyer is proposing a first-dollar tipping basket for indemnification claims instead of a true deductible, meaning if claims exceed $50,000, we become liable for all damages back to dollar zero. How do we structure indemnity baskets and caps to protect our net walkaway cash?

Question

Tyler Smith · Accepted Answer

A tipping basket is a hazardous indemnity mechanism disguised as a seller threshold. Under a tipping basket, if a buyer discovers $50,001 in technical representation breaches post-close, you do not pay $1. You pay the entire $50,001. This creates a dangerous incentive for the buyer's legal team to manufacture minor claims just to tip the threshold and unlock full access to your escrow.

You must insist on a True Deductible basket. Under a true deductible structure, the agreed threshold operates exactly like an insurance policy deductible. If the threshold is set at 0.5 percent of enterprise value, say $50,000, and the buyer successfully proves $60,000 in operational breaches, you are liable only for the $10,000 that exceeds the deductible.

In addition to establishing a true deductible, negotiate three essential protections around indemnification liability:

- Market-standard basket thresholds: Fix the deductible basket between 0.5 percent and 0.75 percent of the total enterprise purchase price.
- Restrictive general indemnity caps: Cap your total exposure for general representation breaches at five to ten percent of the purchase price, supported entirely by a third-party escrow or Reps and Warranties insurance policy.
- Express exclusions from indemnity: Explicitly state that routine working capital adjustments, ordinary customer churn, and matters disclosed on your disclosure schedules can never form the basis of an indemnity claim.

Use your V/TO core values and operational transparency during diligence to show that the business is sound, eliminating any justification for aggressive tipping basket terms.