Indemnification Basket
How M&A indemnification baskets work and where buyers get burned by tipping vs deductible language.
- Tipping vs deductible basket language
- Threshold as a percent of purchase price
- Whether basket applies to fundamental reps
- De minimis individual claim floor
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Analyze My ContractWhat this clause actually does
An indemnification basket is the threshold that must be crossed before the seller has to pay the buyer for breaches of reps and warranties. There are two structures: tipping basket (once losses cross the threshold, the seller pays from dollar one) and deductible basket (the seller only pays the amount above the threshold). The structure dramatically changes the buyer's recovery.
Why people get burned by this clause
On a $3M SMB deal with a 1% basket ($30K), the difference between tipping and deductible can be $30K of real recovery on every breach. Across multiple breach categories, this compounds.
What should make you slow down
- Deductible basket structure where buyer was told it would be tipping
- Basket threshold above 1.5% of purchase price
- Basket applies even to fundamental reps (it should not)
- No de minimis carve-out for individual claims under the threshold
- Basket bundles indemnity with cap so practical recovery is near zero
Where you usually see it
- Asset purchase agreements
- Stock purchase agreements
- Membership interest purchase agreements
What the platform checks in the live contract
- Tipping vs deductible basket language
- Threshold as a percent of purchase price
- Whether basket applies to fundamental reps
- De minimis individual claim floor
- Interaction with cap and survival period
What stronger language usually looks like
- Tipping basket at 0.5% to 1% of purchase price
- Fundamental reps excluded from basket
- De minimis claim floor of $5K to $10K
- Cap and basket are clearly separate dollar values
Definitions worth opening next
Articles that go deeper
Tipping vs deductible is the single biggest dollar swing in the basket. Always confirm which structure applies and exclude fundamental reps from the basket entirely.
See how this clause behaves in the real contract.
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