From the M&A Glossary: Caps and Baskets

Indemnity caps and baskets are key terms in business purchase agreements that relate to the seller’s indemnification obligations for any breaches of representations and warranties made by the seller.

Cap

The cap is the maximum amount of damages that the seller will be obligated to pay to the buyer for breaches of reps and warranties. For example, if the purchase price is $40 million and the cap is set at 10%, the seller’s maximum indemnification obligation would be $4 million.

Basket

The basket is the minimum amount of damages that must be incurred by the buyer before the seller is obligated to indemnify the buyer. For instance, if the basket (a true basket, not a tipping basket) is set at $300,000, the seller will only be responsible for indemnifying the buyer for damages that exceed that amount. Baskets help to avoid disputes over small claims and ensure that the seller is not liable for minor or immaterial breaches.

Caps and baskets are heavily negotiated terms in M&A transactions, as they directly impact the allocation of risk between the buyer and the seller. However, rep and warranty insurance can help smooth negotiations.

For further information on this subject or to discuss a potential business sale, merger or acquisition need, confidentially, contact Al Statz at 707-781-8580 or alstatz@exitstrategiesgroup.com.