Your cap is not your maximum exposure

Your indemnity cap limits one thing: what the buyer can recover for breach of the general representations in the purchase agreement. Covenant breaches, the pre-closing tax indemnity, restrictive covenants, named-matter indemnities and fraud usually sit outside it or above it. Stack those and your real ceiling can approach the entire purchase price.

What do the de minimis, the basket, the cap and the survival period each actually do?

These four devices are separate screens, and a claim has to pass all four to reach your money. The de minimis sizes a single claim. The basket sets an aggregate entry price. The cap sets an aggregate ceiling. The survival period sets the deadline. Each reaches only the obligations its own clause names.

Is my basket a deductible or a tipping basket, and what does that sentence cost?

A deductible basket means the buyer absorbs the threshold amount permanently and you pay only the excess. A tipping basket means the buyer recovers from the first dollar once the threshold is crossed. The gap between the two structures is the entire basket amount, and it turns on one verb in one sentence.

Assume an $8,000,000 price, a $10,000 de minimis, an $80,000 basket, an $800,000 cap.

A deductible reads: the buyer may recover only the amount by which aggregate losses exceed the basket. A tipping basket reads: once losses exceed the basket, the buyer may recover all of them. Same threshold. Different world. Among surveyed deals with baskets, roughly two thirds were true deductibles; the partial-tipping hybrid was rarest.

One caution on every percentage here. The ABA study reads publicly filed agreements from transactions much larger than an owner-operated sale, most sponsor-backed. The structures match yours; the frequencies do not, and none of it fixes what you must accept. Say so when your buyer quotes it back.

Study: ABA Private Target Mergers and Acquisitions Deal Points Study, Market Trends Subcommittee, ABA Business Law Section.

The threshold number is what everyone negotiates. The verb is what decides who pays.

Do small claims and related claims still count toward filling the basket?

They do unless the clause says otherwise, and that decides whether your floors mean anything. Thirty separate $8,000 problems total $240,000. If claims below a $10,000 floor still count toward the basket, the buyer clears an $80,000 basket using items that individually failed the first screen. Three sentences control the outcome.

• The disregard sentence. Losses below the per-claim threshold are disregarded for all purposes, including in determining whether the basket has been exceeded. Without “for all purposes,” the floor screens single claims only.
• The aggregation sentence. Claims arising out of substantially the same facts are treated as one claim. This cuts against you. One misclassified worker category across sixty employees becomes a single large claim, not sixty that die at the floor.
• The scope sentence. The de minimis and the basket apply only to the obligations the clause names. Check whether the tax, covenant and special indemnities are named. Usually not.

Aggregation is fair and you will rarely defeat it. Spend the negotiation on the disregard sentence.

How long should each representation survive, and why is the general tier tied to an audit cycle?

Private deals usually tier survival three ways. General business representations run a short period tied to one full accounting cycle after closing. Tax, benefits and environmental representations track the relevant statutory exposure period. Fundamental representations about the entity itself run long or, subject to state law limits, indefinitely.

• General tier: twelve to eighteen months. One full audit or review cycle after closing, so the buyer closes a year of books under its own control. Surveyed deals cluster in this range, with twenty-four months uncommon. At your size the escrow period often does the practical work, so negotiate both together.
• Specialty tier: tax, benefits, environmental. These track a statutory clock, not an audit. Federal tax assessment generally runs three years after the return is filed, or after the due date if filed early; six years where more than twenty-five percent of the gross income stated on the return was omitted; and without limit where no return was filed or the return was false or fraudulent. Benefits and environmental clocks vary, and some state tax periods run longer.
• Fundamental tier: organization, authority, capitalization, title. Whether the company exists, whether it had power to sign, who owns the equity, whether you owned what you sold. Buyers ask for indefinite survival. If Delaware law governs, a written contract involving at least $100,000 may specify its own limitations period, capped at twenty years from accrual. Other states draw that edge differently, so check the law your agreement picks.

Law: 26 U.S.C. 6501(a), 6501(c), 6501(e). 10 Del. C. 8106(c) (Delaware-governed written contracts).

Now the mechanic that surprises owners. The basket and the cap are commonly drafted by reference to the representations surviving under the general tier. Where they are, moving a representation up to the fundamental tier lifts it out of the basket and the cap at the same moment. Read the cross-references; this is a drafting result, not a rule.

Every representation you agree to move into the fundamental tier, you have probably also moved out of the basket and out of the cap. Confirm you meant to.

The latest edition of the study reports a rising share of surveyed deals with no survival at all, driven by representation and warranty insurance. Those deals are far larger than yours, and a no-survival structure stays uncommon in an owner-operated sale. If your buyer is not buying a policy, your survival clause does all the work.

Which obligations sit outside or above the cap?

The cap covers breach of the general representations. It commonly does not cover covenant breaches, the pre-closing tax indemnity, restrictive covenants, named-matter indemnities or fraud. Those five are where your real exposure lives. Read the carve-out list before you argue about the cap percentage.

• Covenant breaches. A representation states a fact. A covenant promises action or restraint. Pre-closing operating covenants, post-closing cooperation and confidentiality are usually indemnified with no basket and often no cap.
• The pre-closing tax indemnity. Usually standalone, with no basket and no cap, and survival tied to the assessment period if the clause says so. In an equity sale the entity carries its tax history across closing.
• Restrictive covenant breaches. Your non-compete and non-solicit sit outside the cap. Buyers ask for injunctive relief, and an irreparable-harm stipulation helps them ask, but an injunction is discretionary and enforceability turns on your state’s law. A breach switches off an earnout or offsets a seller note only if those documents say so.
• Special indemnities for named matters. The pending wage claim. The classification question. No basket, frequently no cap. Ask for a sub-cap and a hard end date for each.
• Fraud. Uncapped in most agreements, and outside the other limits. How the word is defined is the negotiation.

Contractual fraud here means a knowingly false statement of fact made in the agreement itself, relied on by the buyer, causing loss. Delaware courts will not let a seller escape liability for its own knowing lie inside the agreement, and they have refused to let a survival or non-recourse clause do that work. They will enforce limits on non-intentional conduct, and a well-drafted anti-reliance clause against claims built on statements outside the agreement. In one Chancery case a survival clause terminating the representations at closing did not block well-pleaded claims that they were knowingly false. If another state’s law governs, check its rule.

Cases: ABRY Partners V, L.P. v. F & W Acquisition LLC, 891 A.2d 1032 (Del. Ch. 2006); Online HealthNow, Inc. v. CIP OCL Investments, LLC, C.A. No. 2020-0654-JRS (Del. Ch. Aug. 12, 2021).

What you can do is define the word. The Delaware Supreme Court has held that a contractual limitation to deliberate fraud did not extend to reckless misrepresentation, though common law fraud can reach recklessness. An undefined carve-out is broader than a defined one. Define fraud as a knowing and intentional misrepresentation of a representation actually made in the agreement, with actual reliance.

Case: Express Scripts, Inc. v. Bracket Holdings Corp., 248 A.3d 824 (Del. 2021).

What is a materiality scrape and does it cost me money?

A materiality scrape instructs that all materiality and material adverse effect qualifiers in the representations be ignored for indemnification purposes. You negotiated “no material contract has been breached.” The scrape reads that as “no contract has been breached.” Every small breach becomes a claim, and yes, it costs money.

In the 2005 edition of the study, fourteen percent of deals included one; recent editions report a large majority. Expect the ask, and do not accept that it is settled at your size.

The trade is structural. A double scrape, reaching both whether a breach occurred and how damages are measured, paired with a tipping basket, is the most expensive combination you can sign. Concede the scrape for damage calculation only, insist on a true deductible, and raise the de minimis.

How does the accrued-tax line in closing working capital work against my tax indemnity?

If your deal has a working capital adjustment, taxes booked as current liabilities in the closing statement are amounts you have already paid for once through the purchase price. Without an express exception, you pay a second time under the tax indemnity. That accrual is the only screen a tax indemnity usually has.

The sentence you need is narrow. The tax indemnity covers taxes except to the extent included as a liability in the calculation of closing working capital as finally determined. Under-accruing to flatter working capital deletes your own protection. And “as finally determined” matters, because the buyer’s post-closing adjustment can move that accrual.

Many sales at this size close on a fixed price with no adjustment. If yours does, this screen does not exist and the tax indemnity runs with no deductible. Confirm federal assessment periods and state filing exposure at signing, not at the letter of intent.

Law: 26 U.S.C. 6501. Tax positions in this article are stated as of August 2026.

Can a separate liabilities affidavit undo the limits I negotiated?

It can. A closing affidavit swearing that the business has no undisclosed debts, liens, claims or obligations is a separate promise. Unless the purchase agreement’s exclusive remedy and limitation provisions expressly reach the ancillary documents, the de minimis, the basket, the cap and the survival period do not apply to it.

The pattern is common in smaller transactions. The binder holds an affidavit, a lien certification, sometimes a bill of sale with its own warranty of title, and a certificate restating the representations. Each is a separate promise, live as long as the statute of limitations allows.

The fix is one sentence added to the affidavit. The statements are made solely as of the closing date and are subject in all respects to the limitations in the indemnification article of the purchase agreement, including the survival periods, the basket and the cap, which are the sole and exclusive remedy. Know its limit: no drafting removes exposure for an intentional misstatement, and an affidavit is sworn.

Otherwise: unlimited exposure by accident, created in documents nobody negotiated.

What should I do in the next two weeks?

Turn the indemnification article into one page before the next draft arrives. The limits sit in sections negotiated at different times, and in most deals nobody has added them up. One page puts every obligation beside its floor, its basket treatment, its ceiling and its end date.

• List every indemnity obligation with its de minimis, basket treatment, cap and end date. Blank cells are uncapped exposure.
• Find the verb in the basket clause. It should say the buyer recovers only the excess.
• Find “for all purposes” in the de minimis clause. If it is missing, ask for it.
• Mark the fundamental tier, then ask for one number: the maximum you could owe if every uncapped obligation is breached at once. That is your true ceiling.
• Check every affidavit, certificate and bill of sale for the limitation sentence, and confirm the accrued-tax exception is in the tax indemnity.

Do this while you have leverage. Each point is cheap in a draft and impossible after closing.