What Are the Basket and Cap?

The basket (sometimes called the threshold or deductible) is the minimum dollar amount of losses a buyer must incur before they can claim indemnification from the seller. Below the basket, the buyer absorbs the losses; above it, indemnification kicks in.

The cap is the maximum total amount the seller can be required to pay in indemnification, regardless of how many losses the buyer incurs.

Together, the basket and cap define the ‘corridor’ of seller liability for general rep breaches: losses below the basket = no liability; losses between basket and cap = seller pays; losses above the cap = buyer absorbs (unless RWI or other coverage applies).

Two Types of Basket: True Threshold vs. Deductible

True threshold (‘tipping basket’)

Once losses exceed the basket, the seller indemnifies for the entire amount, including the basket itself. Better for buyers.

Example: $100K basket, $400K total losses → seller indemnifies $400K.

Deductible basket

Once losses exceed the basket, the seller only indemnifies for amounts above the basket — like a true deductible. Better for sellers.

Example: $100K basket (deductible), $400K total losses → seller indemnifies $300K.

Which type applies is heavily negotiated. Deductible baskets are seller-friendly and common in mid-market deals; tipping baskets are buyer-friendly and more common in smaller deals where the basket is relatively small.

Typical Basket and Cap Amounts

Market terms vary by deal size, industry, and whether RWI is in play. Typical ranges for general indemnification:

Without RWI

• Basket: 0.5%–1% of purchase price
• Cap: 10%–15% of purchase price
• Escrow: 5%–15% of purchase price (overlaps with cap)
• Survival: 12–24 months for general reps

With RWI

• Basket: 0.25%–0.5% of purchase price (sometimes zero with RWI deals)
• Cap: Often just the RWI policy retention (~1% of purchase price)
• Escrow: 0.5%–1% of purchase price (mainly for working capital adjustment)
• RWI policy: Typically covers 10%–15% of purchase price for 3–6 years

Fundamental reps (title, authority, taxes) are treated differently:

• Typically no basket (or very low one)
• Cap usually equals or approaches the full purchase price
• Survival usually 5–7 years or even indefinite for taxes

Negotiation Leverage on Basket and Cap

What moves these numbers in your favor as a seller:

Pushes the basket up (less seller exposure)

• Larger deal size (in absolute dollars, baskets scale up with deal value but typically shrink as a percentage)
• Strong sell-side QofE (reduces buyer concern about hidden problems)
• RWI in place (reduces reliance on traditional basket)
• Competitive process with multiple buyers (gives seller more negotiating leverage)

Pushes the cap down (less seller exposure)

• RWI in place (cap can drop to policy retention)
• High-quality, well-documented business (lower risk of large breaches)
• Seller credibility and clean reputation
• Competitive process with multiple buyers

Pushes survival period down (less seller exposure)

• Strong financial statements with audit history
• Sell-side QofE
• Clean operational history (no major lawsuits, regulatory issues)

Worked Examples