If you ask seasoned M&A attorneys where most post-closing disputes happen, they’ll give you the same answer: indemnification.
Indemnity is the mechanism that determines who pays for what if something goes wrong after the deal closes. It governs how long the seller remains on the hook, how much risk they carry, what types of issues can trigger claims, and how buyers recover damages.
In other words:
Indemnity is where legal theory meets financial reality.
Get indemnity wrong, and you can sign a life-changing deal only to spend months—or years—fighting claims, losing escrow money, or navigating disputes that drain your energy and your payout.
Get indemnity right, and you get a clean exit, predictable exposure, and confidence that the deal you negotiated is the deal you’ll actually keep.
As I write in The Entrepreneur’s Exit Playbook:
“Valuation determines how much you get on paper.
Indemnity determines how much you keep.”
At Legacy Advisors, indemnity negotiation is something we coach founders on early because it shapes post-closing peace of mind as much as anything else in the purchase agreement.
What Is Indemnification in an M&A Deal?
Indemnification is a set of contractual protections that govern how buyers recover money if the seller made inaccurate statements—or if unexpected liabilities emerge.
Indemnity clauses answer questions like:
- What happens if a liability surfaces after closing?
- What if a rep and warranty turns out to be wrong?
- What if taxes weren’t paid correctly?
- What if a major customer contract was misrepresented?
- What if an employee claim arises post-closing?
Indemnity is the financial safety net for buyers—and the financial exposure zone for sellers.
Both sides need protection.
Both sides need fairness.
Negotiating that fairness is the art of the deal.
Why Indemnity Exists
Indemnity exists because:
- Buyers do not know the business as well as the seller.
- Buyers cannot discover everything during due diligence.
- Risks and liabilities often surface after the sale.
- Sellers must stand behind the accuracy of their representations.
Without indemnity, buyers would refuse to take on unknown liabilities.
With too much indemnity, sellers take on unreasonable risk.
Fair indemnity sits in the middle.
The Core Components of Indemnification
To negotiate indemnity effectively, you must understand its parts. Here are the major components buyers and sellers negotiate:
1. Survival Periods
This defines how long reps and warranties remain enforceable after the deal closes.
Typical ranges:
- 12–24 months for general reps
- 3–7 years for tax reps
- 3–5 years for fundamental reps (authority, capitalization, etc.)
Buyers want long survival. Sellers want short survival.
2. Caps
This is the maximum amount a seller must pay if indemnification claims arise.
Typical middle-market caps:
- 10–20% of purchase price for general reps
- Up to 100% for fundamental reps
- Unlimited caps only for fraud
Sellers want low caps. Buyers want high caps.
3. Baskets
The basket is the threshold of claims needed before the seller pays anything.
Two types:
- Deductible basket (like car insurance):
Seller pays only after the threshold is passed. - Tipping basket (or “first dollar” basket):
Once the threshold is met, the seller pays all damages from dollar one.
Sellers prefer deductible baskets. Buyers prefer tipping baskets.
4. Escrow / Holdback
Buyers often hold back 5–15% of the purchase price in escrow to cover potential claims.
If no claims arise during the survival period, the escrow is released to the seller.
Escrow protects buyers.
Low escrow protects sellers.
5. Carve-Outs
Carve-outs are exceptions to indemnification limits.
Common carve-outs:
- Fraud
- Willful misconduct
- Taxes
- Environmental issues
- Employee misclassification
- Misstated financials
- Contract breaches not disclosed
Carve-outs increase seller exposure and are heavily negotiated.
6. Claims Process
The purchase agreement defines:
- How claims must be submitted
- How damages are calculated
- What qualifies as a legitimate claim
- The timeline for response
- Methods of resolution
The more clarity, the fewer disputes.
What Buyers Want—and Why
Buyers want indemnity to protect their investment, reduce risk, and ensure the seller stands behind their disclosures.
Specifically, buyers want:
- Long survival periods
- High caps
- Broad reps & warranties
- Tipping baskets
- Big escrows
- Many carve-outs
- Few limitations
From the buyer’s perspective, they’re taking over a business they did not build. Their worst fear is discovering an expensive problem later.
Indemnity gives them comfort.
What Sellers Want—and Why
Sellers want indemnity to:
- Limit post-closing exposure
- Protect their payout
- Prevent endless claims
- Ensure fairness
- Avoid litigation
- Keep personal risk minimal
Sellers want:
- Short survival periods
- Low caps
- Limited reps & warranties
- Deductible baskets
- Small escrows
- Narrow carve-outs
- “Knowledge qualifiers” (reducing exposure)
Founders want peace of mind.
They want to move on without worrying about financial surprises a year later.
The Role of Reps and Warranties Insurance (RWI)
Reps & warranties insurance has transformed indemnity negotiation—especially in mid-market deals above $20M.
RWI shifts most indemnification risk to an insurance company.
RWI benefits:
For buyers:
- More protection
- Faster negotiation
- Reduced seller exposure
For sellers:
- Lower escrow (often 1% or less)
- Lower caps
- Lower survival periods
- Cleaner exit
RWI is not free, but many founders see it as the best risk-reduction tool available.
What’s “Fair” in Indemnity Negotiations?
Fairness depends on deal size, industry, structure, diligence quality, and risk profile—but a typical “fair” indemnity package in the middle market looks like:
- 12–18 months survival for general reps
- 10–15% cap for general reps
- 0.5–1% cap for an RWI deal (seller side)
- 1% or less escrow for RWI deals
- 5–10% escrow without RWI
- Deductible baskets
- Materiality scrapes negotiated case-by-case
- Standard carve-outs with reasonable limits
A fair indemnity package balances protection and practicality.
Buyers want certainty.
Sellers want closure.
The goal is to align both.
Seller Mistakes That Create Unfair Indemnity Terms
After decades in this space, here are the most common mistakes founders make:
1. Ignoring indemnity until late in the deal
Everything gets harder after the LOI is signed.
2. Using a general business attorney instead of an M&A specialist
Indemnity language is where inexperienced attorneys get sellers in trouble.
3. Failing to fully disclose liabilities
If it’s not in the disclosure schedules, it becomes indemnifiable.
4. Assuming escrow money is guaranteed to come back
It’s not. Not if the buyer has legitimate claims.
5. Misunderstanding survival periods
Long survival means long exposure.
6. Underestimating the impact of carve-outs
One badly drafted carve-out can put your whole payout at risk.
7. Not fighting for knowledge qualifiers
These limit what sellers are responsible for.
8. Letting the buyer dictate the indemnity structure
Sellers must negotiate proactively.
How to Negotiate Fair Indemnity Terms
Here’s how founders protect themselves:
1. Involve Your Attorney Early
Indemnity is legal-technical. You need an expert from the start.
2. Push for RWI When Possible
It dramatically reduces your exposure and speeds negotiation.
3. Negotiate Survival Periods First
Shorter periods = less long-term risk.
4. Fight for Reasonable Caps
Caps determine maximum exposure.
5. Push for Deductible Baskets
They eliminate nuisance claims.
6. Narrow Carve-Outs
Carve-outs should be specific and limited, not broad and vague.
7. Ensure Disclosure Schedules Are Comprehensive
The best protection in indemnity is thorough disclosure.
8. Align accounting policies pre-closing
Many claims come from policy mismatches—not fraud.
9. Don’t rush the indemnity section
This is the part of the deal you’ll live with long after closing.
Lessons from Experience
When I sold Pepperjam, indemnity was one of the most scrutinized elements of the deal. Our attorneys helped ensure caps were reasonable, survival periods fair, and disclosures complete. That preparation saved us from post-closing disputes that could have easily arisen later.
Today, at Legacy Advisors, we help founders negotiate indemnity with confidence—because we know buyer risk and seller protection must be balanced for a smooth exit.
The Valuation Advantage
Strong indemnity negotiation improves seller outcomes by:
- Reducing escrow
- Protecting payout
- Reducing claim frequency
- Lowering risk exposure
- Strengthening buyer-seller trust
Buyers pay more—and move faster—when indemnity is clear, fair, and well-structured.
Final Thoughts
Indemnity isn’t glamorous. It’s not the part founders get excited about.
But make no mistake:
Indemnity is one of the most important parts of the purchase agreement.
It determines:
- Your post-closing liability
- Your escrow recovery
- Your exposure to claims
- Your peace of mind
Exits don’t happen when you feel ready — they happen when your business is ready.
And readiness includes the ability to negotiate indemnity terms that protect your legacy, your time, and your financial future.
Find the Right Partner to Help Sell Your Business
At Legacy Advisors, we help founders navigate indemnity negotiation with clarity and strength. We coordinate with top-tier M&A attorneys to ensure every clause is fair, tailored, and aligned with your goals.
Visit legacyadvisors.io to connect with our team, read The Entrepreneur’s Exit Playbook, and explore the Legacy Advisors Podcast (https://legacyadvisors.io/podcast/). Together, we’ll protect your interests from LOI to long after closing.
Frequently Asked Questions About Indemnity in M&A
What does indemnification actually protect in an M&A deal?
Indemnification is the safety mechanism that determines who is responsible if something goes wrong after closing. It protects the buyer from issues that weren’t discovered during diligence: undisclosed liabilities, inaccurate financial statements, unpaid taxes, misclassified employees, contract breaches, and more. For sellers, indemnity defines how long they remain exposed, how much they might owe, and what types of claims they must cover. It’s the guardrail system that allocates post-closing risk. The cleaner and more clearly negotiated the indemnity section is, the fewer surprises occur down the road — and the more peace of mind the seller gets after the wire hits the account.
Why is indemnity one of the most heavily negotiated parts of a purchase agreement?
Because it determines the seller’s real risk after the deal closes. Buyers push for broad, long-lasting protections so they’re not stuck paying for a seller’s past obligations. Sellers push back because they want a clean exit without endless exposure. Every sentence in the indemnity section influences real financial outcomes: escrow size, survival periods, liability caps, carve-outs, and whether an honest mistake could cost the seller hundreds of thousands. Indemnity isn’t academic—it’s the mechanism that decides how much of the purchase price the seller actually keeps.
How long does indemnity typically last after closing?
Most middle-market deals distinguish between different types of reps and warranties. “General” reps often last 12–18 months. “Fundamental” reps (like ownership, authority, and taxes) can last several years. Tax-related reps often survive for the full statute of limitations. The survival period is important because the seller remains legally responsible for any breach during that timeframe. Shorter survival periods are better for sellers because they reduce the window for potential claims. Longer periods are preferred by buyers because they reduce risk. Fairness lives somewhere in the middle.
Do escrow amounts relate directly to indemnity terms?
Yes—escrow is the financial backstop for indemnity claims. Buyers typically hold 5–15% of the purchase price in escrow to cover post-closing disputes. If reps and warranties insurance is used, escrows often drop to 1% or less. A well-structured indemnity section reduces the likelihood that escrow will be tapped, but sellers must understand that escrow is not “their money” until the survival period ends. Escrow and indemnity are intertwined: the broader the indemnity, the bigger the escrow; the narrower the indemnity, the smaller the escrow. Getting this balance right is essential to preserving proceeds.
How can Legacy Advisors help sellers negotiate fair indemnity terms?
At Legacy Advisors, we work closely with specialized M&A attorneys to ensure indemnity terms are fair, balanced, and tailored to the realities of the business. We help founders understand which reps and warranties pose the most risk, prepare complete disclosure schedules that reduce future claims, evaluate whether reps & warranties insurance is appropriate, and negotiate survival periods and caps that protect the seller’s long-term security. Drawing from real-world experience, The Entrepreneur’s Exit Playbook, and discussions on the Legacy Advisors Podcast (https://legacyadvisors.io/podcast/), our goal is simple: protect your payout, reduce future liability, and ensure you leave the deal with confidence.