In our purchase agreement drafts, the buyer insists on a tipping indemnity basket rather than a true deductible for general representation breaches. How do tipping baskets differ from true deductibles, and what exposure does this create for our net cash proceeds post-sale?

Question

Tyler Smith · Accepted Answer

When negotiating the indemnification provisions of a definitive purchase agreement, the structure of the indemnity basket directly determines how much of your post-closing cash is exposed to buyer claims. Buyers use baskets to prevent minor operational disputes from triggering legal indemnification claims, but the difference between a true deductible and a tipping basket is substantial.

A true deductible functions like traditional insurance. If your transaction has a fifty-thousand-dollar deductible basket, the buyer cannot recover any funds until their cumulative indemnification claims exceed fifty thousand dollars. Once that threshold is breached, the buyer can only recover damages exceeding the fifty-thousand-dollar figure. The first fifty thousand dollars remains protected in your pocket as an absolute seller cushion.

A tipping basket, also known as a first-dollar basket, operates differently. Under a tipping basket with a fifty-thousand-dollar threshold, the buyer cannot make a claim until aggregate damages reach fifty thousand dollars. However, the moment that threshold is crossed by even a single dollar, the basket tips. The buyer can now claim indemnification for the entire fifty thousand and one dollars back to dollar one.

Always push for a true deductible in your purchase agreement. Tipping baskets incentivize buyers to hunt for tiny bookkeeping or inventory variances during the survival period, knowing that if they accumulate enough minor issues to cross the threshold, they collect on every single item.

Set your deductible at zero point five percent to one percent of enterprise value. Insist on explicit de minimis claim thresholds so the buyer cannot assemble hundreds of microscopic items to breach the basket.