Baskets and Indemnification
The contractual machinery that decides who pays, and how much, when something the seller promised about the business turns out to be wrong after closing.
What Indemnification Does
A sale does not end the seller's exposure at the closing table. The seller makes a long list of contractual promises about the business (the reps and warranties), and indemnification is the provision that backs those promises with money. McDannell describes it plainly as a purchase-agreement provision that allocates post-sale liability, and notes the seller's job is to narrow it.
"Indemnification: Compensation for loss or harm; backs the promises (reps and warranties) made in a purchase agreement."
Warrillow, The Art of Selling Your Business, Appendix B
If a representation later proves false (undisclosed litigation, an overstated number, a missing license), the buyer can make an indemnification claim. The agreement defines when that claim pays out, from what pool of money, and up to what limit.
Baskets: The Two Flavors
A basket is a loss threshold. Small post-close problems should not trigger a claim every time, so the agreement sets a floor the losses must clear first. Warrillow's lingo decoder distinguishes the two structures, and the difference is large for the seller.
"Basket (true deductible vs. tipping basket): A threshold of losses in an acquisition agreement; a true deductible pays only the excess over the threshold, a tipping basket pays the entire loss once the threshold is exceeded."
Warrillow, The Art of Selling Your Business, Appendix B
With a true deductible, if the basket is $50,000 and the loss is $200,000, the seller owes $150,000. With a tipping basket, the same $200,000 loss is owed in full once the $50,000 line is crossed. Sellers want a true deductible; buyers prefer a tipping basket. This is a negotiated term, not a default.
Escrow and the Claim Pool
Indemnification claims are usually paid out of escrow rather than chased after the seller personally. A neutral third party holds a slice of the proceeds for a defined period after closing.
"Escrow: Money held (usually by a lawyer) for a period after closing to cover post-transaction disputes."
Warrillow, The Art of Selling Your Business, Appendix B
A serious breach of the reps can reach beyond escrow, as Warrillow notes that it "can trigger escrow claims or a lawsuit." That is why the size of the escrow, the length of the survival period, and the overall cap on liability all matter to the seller's net outcome.
What the Seller Negotiates
The mechanics are levers, and McDannell frames the seller's posture as limiting exposure on every one. He advises sellers to "limit liability where possible" on the reps and warranties, and on the indemnification clause itself to "negotiate caps and time limits." The practical targets are: a true deductible rather than a tipping basket, a modest escrow amount, a short survival period, and a hard cap on total liability (often a fraction of the price). None of these reduces the headline number, but each one protects how much of that number the seller actually keeps.
Further Reading
Sources: Warrillow, The Art of Selling Your Business, Appendix B; McDannell, Get Acquired ch.7.