The Purchase Price Is Not the Most Important Number

The buyer says ten million dollars. The seller says yes. Everyone exhales.

They may still be millions apart.

Price tells you what changes hands on the good day. Indemnification tells you who pays when a promise in the purchase agreement turns out to be wrong. Until both sides understand that downside, the economics are not settled.

In plain English, indemnification is the agreement's loss-allocation system. It decides which broken promises produce a claim, which losses count, how much may be recovered, how long the claim survives, and where the recovery comes from.

That last part matters. A broken promise and a collectible claim are not the same thing.

It is the Wile E. Coyote problem in contract form. The deal can appear to be standing on solid ground until the buyer looks down and discovers that the promised recovery is not beneath it.

The Development to Know

A recent Delaware case makes the distinction unusually concrete. In JanCo FS 2, LLC v. ISS Facility Services, Inc., the buyer agreed to pay $80 million for a cleaning business. It held back $5 million of the price to cover indemnifiable losses. The agreement required the seller to indemnify the buyer for losses arising from breaches of the seller's representations and warranties. It also excluded lost profits and diminution in value from the losses the buyer could recover. Delaware Superior Court, JanCo post-trial opinion

After trial, the court found that the seller had broken one contractual promise. But the buyer recovered nothing on that breach. Its damages theory measured the reduced value of the business as a whole, relied on lost profitability, and was not tied closely enough to the broken promise. The agreement excluded those kinds of losses. Because the buyer did not prove an indemnifiable loss, the seller was entitled to the full $5 million holdback. Delaware Superior Court, JanCo post-trial opinion

That is indemnification doing its job, even though it did not produce the result the buyer wanted. The representation answered, “What did the seller promise?” The indemnification package answered the harder question: “If that promise is wrong, what must the buyer prove before the seller writes a check?” Delaware Superior Court, JanCo post-trial opinion

This was one agreement and one dispute, not a statement of market practice. But it proves the larger point. A buyer can prove a broken promise and still have no recovery. The loss, the proof, the exclusions, and the source of payment are part of the bargain too.

Before You Sign

Before debating percentages, make the agreement answer four questions.

First, what starts a claim? The answer often includ

es breaches of representations, warranties, or covenants. It may also include a known tax exposure or pending dispute. These categories may receive different treatment.

Second, what loss can the injured party recover? The definition may include defense costs, taxes, judgments, or third-party claims. It may exclude lost profits or a decline in the company's value. JanCo shows how this definition can decide the economics even after a proven breach.

Third, what limits the claim? This is where baskets and caps enter. A basket is a threshold specified claims must cross. A cap is the maximum recovery for specified claims. Different rules may apply to ordinary representations, fundamental representations, taxes, covenants, fraud, or known liabilities.

The basket itself can work in different ways. Assume a $10 million price, a $100,000 basket, and a covered $300,000 loss. A deductible basket may leave the first $100,000 with the buyer, producing a potential $200,000 claim. A tipping basket may allow recovery of the full $300,000 once the threshold is crossed. That is an illustration, not a recommendation. The words of the agreement control.

Fourth, what happens on the bad day? Pick a plausible problem, such as a financial-statement breach or unpaid taxes. Trace it through the actual agreement: Does it trigger indemnification? Is the loss covered? Does an exclusion, basket, cap, or deadline apply? Who controls the claim? And if the buyer wins, does payment come from escrow, insurance, setoff, or the seller's assets?

Put the answers on one page. Call it a claim map if that helps. The name does not matter. The point is to make the agreement produce an answer before the problem is real.

The Real Negotiation

For a buyer, the highest cap is not automatically the best protection. Ask whether the likely loss is covered, how it must be proven, where recovery comes from, and how long it remains available.

For a seller, the smallest cap is not automatically the cleanest exit. Broad carveouts can swallow the headline limit. Long survival periods extend uncertainty.

For both sides, the lesson is straightforward: negotiate the package, not the percentage.

The purchase price earns the headline. The remedy tells you whether there is a floor when the story changes.

Buy-Side and Sell-Side Support

Tolbert Legal helps buyers and founder-led companies translate deal risk into diligence, purchase-agreement terms, closing mechanics, and practical remedies. Schedule a transaction conversation.

Disclaimer

This publication is for informational and educational purposes only. It is not legal, tax, accounting, insurance, or investment advice. The appropriate structure depends on the transaction, governing law, diligence findings, insurance, and the parties’ negotiated agreement.