Definition. The maximum dollar amount the seller agrees to pay the buyer for breaches of representations and warranties or other indemnified matters. Typically expressed as a percentage of purchase price, commonly 10% to 20% in lower-middle-market deals, though structure varies meaningfully by sector and by deal type.
The indemnification cap, the survival period, the basket/deductible, and the materiality scrape together form the seller’s exposure profile after close. A “10% cap, 18-month survival, 0.5% basket, no scrape” is a meaningfully different post-close profile from “20% cap, 36-month survival, no basket, full scrape.”
Sellers negotiating the cap should understand that lowering the cap typically costs something elsewhere in the deal (a longer survival period, a wider escrow, a more aggressive working capital peg). The full structure is what matters, not any single term.