Indemnification

How Indemnification Works

When a rep is breached or a pre-closing liability surfaces, the indemnification clause determines who bears the cost. In most SMB deals:

• The seller indemnifies the buyer for losses arising from pre-closing operations, undisclosed liabilities, and rep breaches
• The buyer indemnifies the seller for post-closing operations and actions

Key Negotiating Points

Basket (deductible) — A minimum threshold before indemnification kicks in. A $25,000 basket means the seller isn't liable until aggregate losses exceed $25K. Comes in two flavors:

• Tipping basket: Once losses exceed the threshold, the seller pays from dollar one
• True deductible: Seller only pays losses above the threshold

Cap — Maximum total indemnification liability, usually set as a percentage of purchase price (10-15% is common for general reps; 100% for fundamental reps and fraud).

Survival period — How long after closing claims can be made (see representations and warranties).

Escrow/holdback — A portion of the purchase price held in escrow for 12-24 months to fund indemnification claims, reducing the need to chase the seller post-close.

The Practical Limit of Indemnification

Indemnification provisions create legal rights; they don't guarantee collection. A seller who spent the proceeds, has limited assets, or disputes every claim can drag out resolution for years. Buyers on deals without escrow protection often find that indemnification is difficult to enforce in practice.