What is Indemnification Basket?
The Short Answer
Indemnification Basket explained simply
When you sell a business, the buyer might discover issues after the deal closes. An indemnification basket is a clause in the sale agreement that says the buyer can only claim money from you for these issues if the total damages go over a certain amount. Think of it like a deductible on an insurance policy. If the damages are below the basket amount, the buyer absorbs the cost. If they exceed it, the buyer can then claim the full amount, or sometimes just the amount above the basket, depending on how it's structured.
Real-World Example
The Leaky Roof Scenario
Imagine you sell your business, and a month later, the roof starts leaking. The repair costs $5,000. If your sale agreement had an indemnification basket of $10,000, the buyer would have to pay for the roof repair themselves because the damage is below the basket amount. However, if the roof damage was $12,000, the buyer could then make a claim against you for the full $12,000 (in a "first dollar" basket) or for the $2,000 difference (in a "tipping" basket), depending on the specific terms.
Why this matters
This matters because it protects sellers from small, annoying claims after the sale. Without a basket, a buyer could come back to you for every minor issue, which can be a headache and costly. It helps finalize the deal and gives both parties peace of mind that minor post-sale issues won't unravel the agreement.
Always negotiate the size and type of your indemnification basket. A larger basket protects you more, and understanding if it's "first dollar" or "tipping" is crucial for your post-sale liability.
Always negotiate the size and type of your indemnification basket. A larger basket protects you more, and understanding if it's "first dollar" or "tipping" is crucial for your post-sale liability.
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