Indemnification in Private M&A: Baskets, Caps, Escrows, Survival, and Sandbagging
Sellers spend most of a negotiation on price. The indemnification article decides how much of that price they actually keep. A seller can win the headline number and give part of it back through a low basket, a long survival period and an escrow that sits for two years. A buyer can win all of those points and still lose a claim because the fraud carve-out was loose, or because the contract never said what happens when the buyer knew about a problem before closing.
The deal data cited here comes from SRS Acquiom’s 2026 M&A Deal Terms Study, which covers private-target deals that closed in 2025.
Topics covered:
How the Pieces Fit Together
Baskets: Deductible or First-Dollar
Caps
Escrows and Holdbacks
Survival Periods and the Delaware and Texas Statutes
Sandbagging
The Materiality Scrape
Exclusive Remedy and the Fraud Carve-Out
How R&W Insurance Changes the Package
Practical Drafting Options
1. How the Pieces Fit Together
The seller makes representations about the business. When one turns out to be wrong, the indemnification article answers four questions: can the buyer recover, how much, from what pool of money, and for how long. The levers are:
Survival: how long after closing the buyer can bring a claim.
Basket: the losses the buyer absorbs before the seller pays anything.
Cap: the most the seller will pay.
Escrow or holdback: cash set aside at closing to secure the seller’s obligations.
Exclusive remedy: whether indemnification is the buyer’s only path to recovery.
These terms work together, so negotiate them together. A generous cap does a buyer little good if the escrow is thin and claims die nine months after closing.
2. Baskets: Deductible or First-Dollar
The basket is the amount of losses the buyer absorbs before it can recover anything. Its structure matters as much as its size. With a deductible, once losses exceed the basket, the seller pays only the excess. With a first-dollar (or “tipping”) basket, once losses exceed the basket, the seller pays from the first dollar.
Take a $50 million deal with a 0.5% basket ($250,000) and $400,000 of covered losses. A deductible basket gets the buyer $150,000. A first-dollar basket gets the buyer the full $400,000.
In the SRS Acquiom data for 2025 deals, 40% used a first-dollar basket, 32% used a deductible, and 28% had no basket at all. Just over half (55%) of those baskets were 0.5% of transaction value or less.
Check the de minimis threshold too. Many agreements ignore individual claims below a set amount, and those claims often don’t count toward the basket either. Combine a modest per-claim threshold with a basket and a whole category of smaller losses can disappear.
3. Caps
The general cap limits the seller’s exposure for breaches of ordinary representations. In 2025 deals in the SRS data, the median general cap was 10% of transaction value. With R&W insurance in the deal, the median fell to 0.5%, because the policy, not the seller, becomes the main source of recovery.
The general cap is rarely the only one. Agreements usually set a higher limit, often up to the purchase price, for fundamental representations such as organization, authority, capitalization and title to equity. Tax indemnities and specific indemnities for known issues are usually handled separately. Fraud is usually carved out of the general cap, but claims against holders who did not take part in the fraud are most often capped at the purchase price. That is why the definitions of “fundamental representations” and “fraud” deserve as much attention as the cap percentage.
4. Escrows and Holdbacks
An escrow lets the buyer recover without suing the seller. In the SRS data, 88% of 2025 deals had some form of escrow or holdback. The median indemnity escrow was 10% of transaction value in deals without R&W insurance and 0.5% in deals with it.
In practice, the release mechanics matter more than the size:
Timing: whether the escrow releases in one payment at the end of the survival period or in stages.
Pending claims: how much is held back for unresolved claims, and whether the buyer must quantify a claim in good faith to hold funds.
Exclusive source: whether the escrow is the buyer’s only source of recovery for general rep breaches.
Set-off: whether the buyer can also set off losses against an earnout or seller note. Sellers should resist set-off rights that let a disputed claim hold up scheduled payments.
5. Survival Periods and the Delaware and Texas Statutes
In 2025 deals in the SRS data, the median survival period for general representations was 12 months. Fundamental representations commonly survive much longer, and tax representations often survive until shortly after the statute of limitations runs. State law decides whether a survival clause does what the parties meant it to.
Delaware. Section 8106(c) of Title 10 of the Delaware Code lets a written contract involving at least $100,000 set the period for bringing a claim, up to 20 years from accrual. Parties to a Delaware-law agreement can therefore extend survival for fundamental representations well beyond the default three-year limitations period.
Texas. Section 16.070 of the Texas Civil Practice and Remedies Code generally voids any contract that shortens the time to sue to less than two years. The statute does not apply, however, to an agreement for the sale or purchase of a business entity where the consideration is at least $500,000. Many Texas M&A deals will meet that threshold, so a 12- or 18-month survival period is not void under Section 16.070. Smaller deals, and deals structured in a way that may not fit the exception, should be checked.
Whichever law applies, write the survival clause as a deadline: claims must be brought by written notice describing the claim before a specific date, and a claim noticed in time survives until it is resolved.
6. Sandbagging
Sandbagging asks whether a buyer can recover for a breach it knew about before closing.
Delaware. In Arwood v. AW Site Services, LLC (Del. Ch. Mar. 9, 2022, amended Mar. 24, 2022), the Court of Chancery stated that Delaware “is, or should be, a pro-sandbagging jurisdiction,” reasoning that reliance is not an element of a breach of contract claim. The court added that, even if Delaware recognized the defense, a buyer’s reckless state of mind, as opposed to actual knowledge, would not trigger it. Two caveats apply. First, in its amended opinion the court found that the agreement expressly allowed sandbagging, and it addressed the default rule only as an alternative ground. Second, the Delaware Supreme Court has not resolved the question. In Eagle Force Holdings, LLC v. Campbell (Del. 2018), it acknowledged the debate without deciding it.
Texas. We are not aware of a Texas appellate decision resolving sandbagging under an M&A purchase agreement. The Texas Supreme Court has described a breach of express warranty claim as requiring “a form of reliance” in American Tobacco Co. v. Grinnell (Tex. 1997), a product liability case, and some commentators read that as Texas leaning against sandbagging. A buyer under a Texas-law agreement should not count on silence to protect it.
In either state, the answer is to deal with it in the contract. In the SRS data for 2025 deals, 50% of agreements included an express pro-sandbagging provision, 49% were silent, and fewer than 1% were anti-sandbagging. A seller that cannot get an anti-sandbagging clause can still narrow the risk by limiting the buyer’s recovery for matters specifically disclosed in the data room or the disclosure schedules.
7. The Materiality Scrape
Many representations carry materiality qualifiers, such as “no material litigation” or “in all material respects.” A materiality scrape ignores those qualifiers for indemnification purposes. It can apply to deciding whether a breach occurred, to calculating losses, or to both (a “double scrape”). In the SRS data, 83% of 2025 deals included some form of scrape.
Watch the combination. A double scrape, a low basket and first-dollar recovery together is about as buyer-friendly as an indemnity package gets. Sellers should push to limit the scrape to calculating losses, or accept a double scrape only alongside a real deductible.
8. Exclusive Remedy and the Fraud Carve-Out
Most private-target agreements make indemnification the buyer’s exclusive remedy for breaches of the agreement. In the SRS data, 92% of 2025 deals did so. The exclusive remedy is commonly subject to a fraud carve-out, and Delaware courts have drawn clear lines around what that carve-out can and cannot do.
What sellers cannot avoid. In ABRY Partners V, L.P. v. F&W Acquisition LLC (Del. Ch. 2006), the Court of Chancery held that public policy prevents a seller from contractually insulating itself from liability for its own intentional false statements in the agreement. Limits on liability for reckless or negligent misrepresentation are enforceable.
How “fraud” gets defined. In Express Scripts, Inc. v. Bracket Holdings Corp. (Del. 2021), the Delaware Supreme Court held that a carve-out for “deliberate fraud” did not reach reckless conduct. The agreement’s definition of fraud controls what the buyer can recover outside the cap.
Who is protected. In Online HealthNow, Inc. v. CIP OCL Investments, LLC (Del. Ch. 2021), the Court of Chancery held, at the pleading stage, that a survival clause could not bar fraud claims based on the contract’s representations. It also held that a non-recourse provision could not shield an affiliate alleged to have known of and facilitated the false representations.
Sellers should define fraud narrowly: actual and intentional fraud, with actual knowledge, in the making of the express representations in the agreement. Buyers should resist definitions that look only to the knowledge of a few named individuals, or that leave out fraud in certificates delivered at closing.
9. How R&W Insurance Changes the Package
R&W insurance was identified in about 46% of 2025 deals in the SRS data. Where it is used, the policy becomes the buyer’s main source of recovery. The seller’s indemnity often shrinks to a small escrow sized to part of the policy retention, or to nothing beyond fraud and specific indemnities.
That moves the negotiation somewhere else. Policies typically exclude matters known to the buyer’s deal team and issues found in diligence, so buyers often ask for special indemnities covering those items. Sellers should expect the real discussion to be about the scope of those special indemnities, how known issues are treated, and whether the seller backstops anything the policy excludes.
10. Practical Drafting Options
For sellers:
Seek a deductible basket, a per-claim threshold that doesn’t count toward it, and a scrape limited to calculating losses.
Make the escrow the exclusive source of recovery for general rep breaches, with staged releases.
Define fraud narrowly and tie it to the express representations in the agreement.
Seek an anti-sandbagging clause, or at least exclude matters specifically disclosed.
For buyers:
Include an express pro-sandbagging clause, particularly under Texas law.
Draft survival as a claims deadline, with claims noticed in time surviving until resolved.
Carve fundamental representations, taxes and known issues out of the general basket and cap.
Preserve set-off rights against earnouts and seller notes for finally determined claims.
Define fraud to cover closing certificates and the knowledge of the seller’s key management.
The Real Lesson
Basket, cap and escrow percentages are easy to compare across deals, which makes them easy to trade away. Claims are won or lost on the definitions: fraud, losses, fundamental representations and what the buyer knew.
Frequently Asked Questions
What is a typical indemnification cap in private M&A?
In SRS Acquiom’s data on 2025 deals, the median general cap was 10% of transaction value, falling to 0.5% in deals with R&W insurance. Fundamental representations and fraud are usually capped higher or not at all.
What is the difference between a deductible and a tipping basket?
With a deductible, the seller pays only losses above the basket. With a tipping (first-dollar) basket, once losses exceed the threshold, the seller pays from the first dollar.
Is Delaware a pro-sandbagging state?
The Court of Chancery said in 2022 that Delaware is, or should be, pro-sandbagging, but the Delaware Supreme Court has not decided the issue. Parties should address it expressly in the agreement.
Can a Texas M&A agreement shorten the survival period to less than two years?
Generally yes, for a sale or purchase of a business entity with consideration of at least $500,000. Section 16.070 of the Texas Civil Practice and Remedies Code exempts those agreements from its two-year minimum.
Can a seller limit liability for fraud?
Under Delaware law, a seller cannot contractually avoid liability for its own intentional false statements in the agreement, but it can limit liability for reckless or negligent misstatements and can define fraud narrowly.
For advice on a sale or acquisition, joint venture or minority investment, reach out to us. Learn more about our Chambers and Legal 500 ranked M&A Practice.
Sources
• SRS Acquiom, 2026 M&A Deal Terms Study
• Arwood v. AW Site Services, LLC, C.A. No. 2019-0904-JRS (Del. Ch. Mar. 9, 2022, amended Mar. 24, 2022), opinion
• Express Scripts, Inc. v. Bracket Holdings Corp. (Del. Feb. 23, 2021), opinion
• Online HealthNow, Inc. v. CIP OCL Investments, LLC, C.A. No. 2020-0654-JRS (Del. Ch. Aug. 12, 2021), opinion
• ABRY Partners V, L.P. v. F&W Acquisition LLC, 891 A.2d 1032 (Del. Ch. 2006)
• American Tobacco Co. v. Grinnell, 951 S.W.2d 420 (Tex. 1997)
• 10 Del. C. § 8106, Delaware Code
• Tex. Civ. Prac. & Rem. Code § 16.070, text
• Eagle Force Holdings, LLC v. Campbell, 187 A.3d 1209, 1236 n.185 (Del. 2018)This information is provided by Ebadat PLLC for educational and informational purposes only and is not intended, nor should it be construed, as legal advice or creating an attorney-client relationship. Our Notice and Terms of Use apply. 