The reps tell a buyer what they're owed if the agency turns out wrong; indemnification decides whether they can actually collect it, and how much, and for how long. It's a three-lever system, and the levers interact on every breach — so a buyer who optimizes one in isolation often gives back more on another. The single biggest mistake is treating the basket as a dollar-amount negotiation when its structure matters far more.
§ 01 · The Risk TriangleFloor, ceiling, clock.
| Lever | What it controls |
|---|---|
| Basket (floor) | The threshold of losses before any claim is payable — 0.5%–1% of price |
| Cap (ceiling) | The maximum recovery — 10%–15% general, uncapped fundamental |
| Survival (clock) | How long a claim can be brought — 12–24 months general, 3–6 years fundamental |
The three levers form what's worth thinking of as a risk triangle, negotiated independently but interacting on every breach. The basket is the floor — the threshold of accumulated losses before any claim is payable, benchmarked at 0.5%–1% of the purchase price ($25K–$50K on a $5M deal), often with a $5K–$10K per-claim minimum below which an individual issue doesn't even count toward the basket, preventing trivial issues from aggregating to clear the threshold. The cap is the ceiling — 10%–15% of price for general reps ($600K on a $5M deal at 12%), uncapped up to the full price for fundamental reps (and sometimes beyond, for fraud). The survival period is the clock — 12–24 months for general reps, 3–6 years for fundamental, and the statute of limitations plus 60–90 days for tax reps. All three are anchored by an indemnification escrow of 5%–15% of price, held 12–18 months, as the first source of recovery.
§ 02 · Basket type beats basket amountDeductible vs. tipping.
The biggest single optimization is basket type, not basket amount. A deductible basket pays only the excess over the threshold; a tipping basket pays from the first dollar once the threshold is crossed. On a $5M deal with a $50K basket and a $100K breach, the deductible pays $50K and the tipping pays the full $100K. Concede a higher dollar threshold in exchange for the tipping structure — the structure is worth more than the number.
The deductible-versus-tipping distinction is where buyers leave the most money on the table, because it's easy to miss and large in effect. A deductible basket works like an insurance deductible — the seller is never on the hook for the threshold amount, so a $100K breach over a $50K basket recovers $50K. A tipping basket flips once crossed — the entire loss becomes recoverable from the first dollar, so the same $100K breach recovers the full $100K. Tipping is buyer-friendly, deductible is seller-friendly, and the smart trade is to concede a higher dollar threshold to win the tipping structure, because the structure compounds across every breach while the threshold is a one-time give. This is the pattern behind the broader finding that buyers leave 1%–3% of the purchase price on the table by under-negotiating these provisions — and basket-type-before-basket-amount is the largest piece of that.
§ 03 · The escrow and the three tiersWhere recovery actually comes from.
Recovery in practice flows from the escrow before it ever reaches the seller's pocket, which is why the escrow structure matters as much as the caps. A middle-ground three-tier structure aligns the escrow to the rep tiers: general reps recover exclusively from the escrow, capped at 10%–15%; fundamental reps recover first from the escrow and then, if exhausted, unlimited up to the full purchase price; and fraud is uncapped with no exclusive remedy. The survival clocks reinforce the tiers — a 12-month general survival covers a single post-closing financial review cycle (seller-friendly), while 24 months covers two annual closings, two tax returns, and a meaningful renewal cycle (buyer-friendly), and the tax-rep survival tracks the statute of limitations (three years for federal income tax, six for substantial understatements). The escrow is the first thing a buyer actually reaches when a rep covered in the Big Six reps turns out to be wrong.
§ 04 · Exclusive remedy and the standard postureWhere the deal usually lands.
The seller's primary defensive tool is the exclusive-remedy clause, which channels all post-close disputes through the indemnification framework and away from common-law remedies — with standard carve-outs for fraud (universal) and sometimes for fundamental-rep breaches (buyer-favorable deals). It's worth understanding because it defines the boundaries of everything else: if indemnification is the exclusive remedy, the caps and survival periods are the whole of the buyer's recourse, so they have to be right. The standard middle-market posture on a $5M deal gives a concrete anchor: a $50K deductible basket, a 12.5% cap ($625K), an 18-month survival, and an exclusive remedy with fraud and fundamental-rep carve-outs. A buyer negotiating against that anchor should remember the optimization order — basket type first, then survival length, then the dollar amounts — because that's the sequence that recovers the 1%–3% of price most buyers concede. The clause-drafting craft behind these mechanics is in indemnification caps and baskets.
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Terminology on this shelf
- Risk triangle
- The three indemnification levers — basket (floor), cap (ceiling), survival (clock).
- Deductible vs. tipping basket
- Deductible pays only the excess; tipping pays from the first dollar once crossed — the key structural choice.
- Basket benchmark
- 0.5%–1% of purchase price, often with a $5K–$10K per-claim minimum.
- Cap benchmarks
- 10%–15% of price for general reps; uncapped to full price for fundamental.
- Indemnification escrow
- 5%–15% of price, held 12–18 months, as the first source of recovery.
- Exclusive remedy
- The seller's clause channeling disputes through indemnification — with fraud (and sometimes fundamental) carve-outs.