Selling a Business

Escrow, Holdbacks, and Indemnity Baskets

Read the indemnity architecture as a system (survival, basket, de minimis, cap, escrow, and the carve-outs that punch through all of them) and know which terms actually determine what you keep.

  • Advanced
  • 9 min total
  • 12 chapters

What decision this helps you make: How much to hold back, for how long, against which claims, with what thresholds and caps, and where to concede when the buyer pushes.

What this topic is

The post-closing risk allocation machinery of a private purchase agreement: how long representations survive, the deductible or tipping basket below which no claim may be brought, the per-claim de minimis, the aggregate cap, the escrow or holdback that secures payment, and the fundamental representations, tax matters, and fraud carve-outs that sit outside the ordinary limits.

Why it matters

Enterprise value is the number everyone negotiates. The indemnity architecture determines how much of it you actually keep and when. A ten percent escrow held for twenty-four months against representations that survive for three years is a materially different deal from a five percent escrow held for twelve months with insurance behind it, and the difference is invisible on the first page.

Who should learn it

Owners and advisers negotiating a purchase agreement, and anyone whose letter of intent says escrow "to be agreed."

What you will understand

  • How the six components interact, and why negotiating them individually loses money
  • The difference between a deductible basket and a tipping basket, and what each is worth
  • What sits outside the cap (fundamental representations, tax, fraud) and why that is where the real exposure lives
  • How sandbagging, materiality scrapes, and the definition of losses change the practical outcome

Prerequisites

Common misconception

"The escrow is the seller's exposure." The escrow is the buyer's security, not the ceiling of your liability. The ceiling is the cap, and several categories sit outside it: fundamental representations, pre-closing taxes, and fraud commonly run to the full purchase price or are uncapped entirely. A seller focused on the escrow percentage while ignoring the carve-outs has negotiated the small number and conceded the large one.