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Roger L. Neu

 

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Indemnity

Question: What does it mean to have an indemnity “cap” and “deductible” or “basket?”

The “cap” is the monetary limit put on how much the buyer can recover from the seller in the case of a breach of a representation and warranty. The “cap” can vary generally from the full amount of the purchase price to as low as 20% of the purchase price. The “deductible” or “basket” is the cushion that the seller gets before the buyer can recover damages. If the “deductible” is $200,000, the buyer would have to incur damages in excess of that amount and would only be able to recover damage above that amount. In the case of a “basket” the buyer would be able to recover all damages from the first $ after total damages exceed $200,000. The deductible is generally 1% or less of the purchase price. The actual cap/deductible/basket amounts and limits are dependent on how competitive the buyer has to be to win the bid to acquire the seller.


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