Indemnity Baskets in M&A: What a “Tipping Basket” Really Means (and Why It Matters)
Indemnity provisions rarely get top billing in deal discussions. They sit quietly in the back half of the agreement, often after momentum has built and patience is running thin. But a single sentence in an indemnity basket can materially shift risk, economics, and post-closing leverage.
One concept that comes up a fair amount, sometimes explicitly, often not, is the tipping basket. Understanding how it works, and how it compares to other basket structures, is essential if you want to know where the real risk in a deal lives.
What Is an Indemnity Basket?
An indemnity basket is a threshold. It defines how much loss must accumulate before the indemnifying party (usually the seller) has to start paying indemnification claims.
Think of it as the “noise filter” in a transaction. The basket is meant to keep immaterial issues from turning into claims, while preserving indemnification for problems that actually matter.
But the way that filter is designed can dramatically change the economics of a deal.
The Three Most Common Indemnity Basket Types
1. The Tipping Basket (a.k.a. First-Dollar Basket)
In a tipping basket structure, losses must exceed a stated dollar amount before indemnification applies. But once that threshold is crossed, all losses are recoverable, including the first dollar.
Imagine a buyer acquires a manufacturing business. Post-closing, the buyer discovers several issues: a missed environmental permit renewal, a misclassified group of employees, and a small but persistent sales tax underpayment. Individually, none of these problems seem catastrophic. Over several months, the buyer incurs compliance costs, professional fees, and back taxes that slowly add up.
By the time the buyer finishes cleaning things up, the total out-of-pocket losses reach just over $500,000—the amount of the indemnity basket.
Because the basket is a tipping basket, crossing that line doesn’t just unlock indemnification for the last few dollars of loss. Instead, the entire $500,000-plus becomes recoverable from the seller. What looked like a series of manageable issues suddenly turns into a half-million-dollar indemnity claim.
That sudden shift is the defining feature of a tipping basket.
2. The Deductible Basket (True Deductible)
A deductible basket operates more like traditional insurance. The buyer bears losses up to the basket amount, and the seller is responsible only for losses above that threshold.
Using the same manufacturing business example, assume the buyer again uncovers compliance issues and incurs professional fees, penalties, and remediation costs. This time, however, the indemnity basket is structured as a true deductible.
When the buyer’s total losses reach $500,000, nothing happens from an indemnification standpoint. The buyer has absorbed those costs as part of the deal risk it agreed to take on.
Only when additional losses push the total to, say, $600,000 does indemnification kick in—and even then, the seller is only responsible for the $100,000 above the basket. There is no retroactive recovery and no sudden economic cliff.
From the seller’s perspective, this structure provides more predictability. From the buyer’s perspective, it means accepting more downside risk in exchange for cleaner economics.
3. Hybrid or Modified Baskets
Some deals land somewhere in between, using a hybrid approach that softens the cliff without fully adopting a deductible structure.
For example, imagine the buyer and seller agree that once the basket is met, the seller will cover 50% of all losses. Post-closing, the buyer again faces a mix of compliance failures and contract issues—perhaps a key customer agreement wasn’t properly assigned, requiring concessions to preserve the relationship.
When total losses reach $600,000, the basket has clearly been met. Under this hybrid structure, the seller is responsible for half of that amount. The buyer recovers $300,000, rather than everything (as in a tipping basket) or only the excess (as in a deductible).
Hybrid baskets can be a useful compromise, but only if the agreement clearly explains how the math works. Ambiguity here tends to surface later, when the relationship between buyer and seller is already strained.
Basket Mechanics Don’t Exist in Isolation
The real risk often isn’t the basket itself—it’s how the basket interacts with other indemnity concepts.
Here are a few things I always flag when reviewing these provisions.
1. De Minimis Thresholds
Most deals include a per-claim minimum before a loss even counts toward the basket. That makes sense in theory. Nobody wants to litigate over a $10,000 invoice dispute.
But pay attention to what happens once the basket is met. In many agreements, once that threshold is crossed, all qualifying claims count, including earlier ones that were previously ignored.
In practice, that means a handful of small vendor disputes or minor compliance costs—issues the buyer initially shrugged off, can suddenly become economically meaningful once a larger issue tips the basket.
2. Materiality Scrapes
Materiality scrapes remove materiality qualifiers for indemnification purposes.
Consider a representation stating that the company has not breached any “material” contracts. Without a scrape, a minor breach resulting in a modest settlement might never count toward indemnification. With a scrape, that same breach becomes a recoverable loss.
When multiple small contract issues are scraped into the indemnity calculation, the basket can fill much faster than either party expected—particularly in a tipping basket structure, where crossing the line has outsized consequences.
3. Caps and Survival Periods
Caps and survival periods define the outer limits of indemnification exposure: how much can be recovered and how long claims can be brought.
A tipping basket combined with a high cap and a long survival period can materially extend seller exposure. For example, a seller may assume that once a year has passed post-closing, the deal risk is largely behind them—only to find that a late-arising issue pushes losses just over the basket shortly before the survival period expires, unlocking significant recovery potential.
Understanding how these provisions work together is far more important than evaluating any one of them in isolation.
Buyer vs. Seller Perspectives (and Why That’s Okay)
There’s no universally “right” basket structure.
Buyers tend to favor tipping baskets because they provide meaningful protection once real problems emerge. Sellers tend to prefer deductible baskets because they reduce the risk of disproportionate liability from marginal issues.
The goal isn’t to eliminate risk—it’s to allocate it knowingly.
The Practical Takeaway
A tipping basket is not just a drafting choice. It’s an economic lever.
When reviewing indemnity provisions, it’s worth slowing down and asking:
Does this basket tip?
How do losses realistically arise in this business?
What happens economically once the threshold is crossed?
Those answers often matter more than the headline purchase price.
At Cruxterra, we spend a lot of time translating indemnity provisions into plain-English risk so clients understand what they’re actually agreeing to. If you’re negotiating or reviewing a deal and want a second set of eyes on how the indemnity math plays out in the real world, that’s exactly the kind of work we do. Let us help. Reach out today LetsGo@Cruxterra.com
