Tipping Basket: A tipping basket is a reference to a particular type of limit to the indemnification made by a seller to a buyer of a business. It is customary in any sale of a business for the buyer to require certain, limited indemnifications against potential liabilties, known or unknown, that might arise due to actions taken by the seller prior to closing.In such an indemnification arrangement, there is customarily both a basket and a cap. The cap refers to the limit on liability that the seller assumes. In my experience, the limit is always less than the proceeds of the sale, meaning that even if such a liability arises and a claim is made, the seller gets to keep something.
The basket refers to the threshold that applies before the buyer calls the seller to request indemnification. Everyone acknowledges that little things may come up and there is no sense making an issue of them. That said, once a threshold of real dollars is reached, the buyer wants to be able to seek help.
There are two types of baskets. First, a true basket works like an insurance deductible. The buyer can never claim the value of the basket. For instance, if the basket were $100,000 and the buyer's claim were $250,000, the buyer would receive $150,000 from the seller.
The second type of basket is a tipping basket. In the scenario above, the buyer would receive the full $250,000. Once the threshold of the basket is reached, it tips over and all of the liability becomes the problem of the seller under the terms of the indemnification.
All else equal, sellers want true baskets and buyers want tipping baskets.
» Devin's Definitions: Indemnification from MidMarketMaven
Indemnification: When a business owner sells a business to a new buyer, the seller makes a host of representations about the condition of the business and then provides an indemnification or guarantee that the representations are accurate.The ind... [Read More]
Tracked on: February 1, 2007 10:29 PM | Permalink to Trackback