Indemnities in a Company Sale: What They Mean and How to Negotiate Them?

Selling a company means allocating risk. Indemnities decide who pays if something goes wrong after closing.

The indemnity meaning in an M&A context is simple: a seller’s promise to reimburse the buyer for a specified loss. If we define indemnity, it is a repayment obligation. The indemnification meaning refers to the process of enforcing that promise. If you define indemnification, it is the act of compensating under that obligation. To clarify the indemnify, to indemnify is to protect someone against financial loss. In plain terms, what does to indemnify mean? It means you may have to pay.

This guide explains the indemnity definition, the indemnity meaning in law, how indemnities in a share purchase agreement (SPA) differ from warranties vs indemnities, and how caps, baskets, and W&I insurance change your risk.

Indemnity Meaning

When you sell your company, buyers will ask for indemnities. In simple terms, an indemnity refers to the seller’s promise to reimburse or pay back the buyer for a specific liability that may arise after completion. Leading law firms note that indemnities entitle the buyer to payment without the need to prove the underlying breach. The buyer needs only to show that the specified event occurred; there is no onus to prove fault or establish a decrease in value.

A quick example helps. Suppose you complete a sale and a previously unknown tax bill surfaces. Under a well‑drafted indemnity, the seller must reimburse the buyer for that tax liability. This promise is separate from warranties; it is a repayment obligation for a defined risk. In this sense, the indemnity definition in M&A echoes its indemnification definition in law: to indemnify means to protect against or make whole for losses.

Indemnification Meaning and How It Differs From “Indemnity”

While the terms are often used interchangeably, there is a nuance. Indemnification, meaning describes the act of compensating or making good on the loss, whereas indemnity meaning refers to the contractual promise itself. In other words, an indemnity clause is the promise, and indemnification is the process of paying for the losses that trigger that promise. Under English law, indemnities in a contract operate as debt‑like obligations; the buyer does not need to establish breach or prove reliance.

Why Indemnities Matter When You Sell a Company?

Selling a company involves risk allocation. Buyers often adopt a “buyer beware” approach and expect sellers to stand behind specific liabilities. Indemnities address this by shifting defined risks back to the seller. Without them, a buyer may reduce the purchase price or insist on holding a significant portion of the price in escrow. For founders, indemnities can delay the release of sale proceeds and create post‑completion stress. Understanding how to define and negotiate these obligations early can improve certainty, speed and the final purchase price.

Recent surveys illustrate why these clauses matter. The 2024/2025 middle‑market M&A survey found that median indemnity escrow amounts in non‑insured deals rose to roughly 9% of the purchase price and that survival periods for general claims increased to 18 months. The same survey noted a median indemnity cap of 10% for non‑insured deals. These statistics highlight how indemnities directly affect proceeds and timelines. Sellers must negotiate the scope of liabilities they will reimburse and the amount of the purchase price that will be held back to cover potential claims.

Indemnity vs Warranty and Why Buyers Care About the Difference

Warranties and indemnities both allocate risk, but they operate differently. A warranty is a statement about the state of the business. If a warranty is inaccurate, the buyer must prove breach and quantify the loss suffered. An indemnity, by contrast, is a reimbursement promise triggered by a specified liability; the buyer does not need to prove loss. This distinction matters because indemnities provide more certainty for the buyer and greater exposure for the seller.

Where Indemnities Show Up in a Sale Process

Indemnities appear throughout the sale journey:

1. Heads of terms and negotiation: Parties may outline headline indemnities, such as a tax covenant or known litigation, in their term sheet.
2. SPA drafting: The indemnities in a share purchase agreement articulate scope, notice requirements and financial caps. They often distinguish between general indemnities (breach of representations and warranties) and stand‑alone indemnities for specific risks.
3. Disclosure letter: Sellers disclose known issues; undisclosed matters may still be covered by warranties but may give rise to indemnity claims if separately negotiated.
4. Completion accounts and adjustments: Purchase price adjustments may be netted off against indemnity liabilities.
5. Post‑completion claim windows: Indemnity claims are subject to time limits. Notification periods are often 15–30 days after the seller learns of a claim, and general claims may be time‑barred after 18–36 months, while tax claims can survive up to six years.

Common indemnities in a share purchase agreement

Most sale agreements include a set of common indemnities. Knowing them helps founders anticipate and mitigate risk.

• Tax indemnity / tax covenant: Buyers typically require sellers to reimburse any unpaid taxes accruing before completion. Tax liabilities can arise from undeclared VAT, employment taxes or historical filings. Because tax authorities can investigate years after closing, these indemnities often survive longer than other claims.
  
  
• Intellectual property (IP) ownership and infringement: Buyers want assurances that the company owns its IP and that no third party claims infringement. A stand‑alone indemnity may cover losses from IP disputes.
  
  
• Employee claims and misclassification: Disputes over unpaid wages, misclassification of contractors or unfair dismissal can trigger indemnity obligations. Law firms highlight that employment‐related claims are common causes of indemnity claims.
  
  
• Litigation and regulatory investigations: Sellers might indemnify the buyer for ongoing lawsuits or regulatory investigations, such as environmental fines or data‑protection breaches.
  
  
• Data/privacy breaches: With increasing cyber‑security regulation, buyers often negotiate special indemnities covering data‑privacy liabilities. McGuireWoods notes that buyers may seek higher caps, lower baskets and extended survival periods for such risks.
  
  
• Environmental and real estate liabilities: If the business owns or leases property, sellers may indemnify for environmental contamination or property defects.
  
  

Each of these indemnities in a contract should be tailored. The goal is to define the indemnity meaning clearly: what losses it covers, when it applies and how it will be paid. Without specificity, disputes later arise about whether the claim is covered.

Indemnity Clause Basics (What to Look For)

A well‑drafted indemnification clause (sometimes called an indemnifying clause or clause of indemnity) answers four questions:

1. Scope of loss: Does the indemnity cover only direct losses (e.g., tax payable) or also indirect or consequential losses such as lost profits? Sandberg Phoenix explains that indemnities generally reimburse actual losses and costs. Sellers often seek to exclude indirect or consequential losses.
2. Notice requirements: The contract should specify how and when the buyer must notify the seller. A failure to notify within the agreed period can bar the claim.
3. Conduct of claims: The clause should clarify who controls the defence of a claim. For example, the indemnification contract might allow the seller to assume the defence of third‑party claims, with the buyer cooperating and providing evidence. If the seller does not take control, the buyer may defend at the seller’s expense.
4. Payment mechanics: Payment may occur via cash reimbursement, set‑off against deferred consideration or release of funds from an escrow.

These elements ensure clarity. Without them, parties may argue over whether a claim has been properly notified or whether the loss falls within scope.

Negotiation Levers that Protect Sellers

Sellers can negotiate several features to limit exposure while satisfying buyer concerns:

Caps on Liability

A cap limits the seller’s total liability for general indemnities to a percentage of the purchase price. Market studies indicate that median indemnity caps hover around 10 %, though caps vary with deal size. The ABA’s Deal Points Studies track indemnity cap levels as a percentage of transaction value across hundreds of private company deals. They have observed a trend of indemnity caps declining as a percentage of deal value over many years, reflecting broad market practices. Sellers should propose separate caps for different indemnities and push for no liability above the purchase price.

Baskets and De Minimis

A basket sets a threshold of losses that must be exceeded before the buyer can claim indemnity. Two main types exist: a true deductible, where the seller reimburses only losses above the basket amount, and a tipping basket, where once the threshold is reached, the buyer recovers all losses from the first dollar. Sellers should negotiate a reasonable basket and a de minimis threshold for individual claims (for example, claims below £10,000 are ignored).

Time Limits/Survival Periods

Indemnities are not indefinite. Typical survival periods for general warranties and indemnities range from 18 months to three years. Tax indemnities often survive up to six or seven years. Recent market data show that non‑insured deals have a median general survival period of 18 months. Sellers should ensure that claims cannot be made after the survival period has lapsed.

Knowledge Qualifiers and Disclosures

Including a knowledge qualifier means a buyer cannot claim indemnity if it knew about the issue before signing. Sellers should also ensure full disclosure of known liabilities; matters disclosed in the data room or disclosure letter are usually excluded from indemnities. Disclosure reduces the risk of post‑closing claims and signals transparency.

Materiality Scrapes and Carve‑Outs

Buyers may seek materiality scrapes, which ignore materiality qualifiers for purposes of calculating losses. Sellers should resist or limit these because they expand liability. Carve‑outs remove specific risks from caps or baskets; fraud, fundamental representations and covenants often remain uncapped. Negotiating carve‑outs is key because they determine when the seller faces unlimited liability.

Excluding Consequential Loss and Double Recovery

To avoid disproportionate exposure, sellers should exclude consequential or remote losses and prevent the buyer from recovering the same loss under multiple provisions. Clear drafting avoids duplication and ensures indemnities remain targeted.

Warranty and Indemnity Insurance (W&I) and Indemnity Policy

Warranty and indemnity (W&I) insurance, sometimes called an indemnity policy, transfers liability from the seller to an insurer. The buyer (or sometimes the seller) purchases a policy that covers breaches of warranties and certain indemnities. This tool has grown in popularity. A UK overview explains that W&I insurance can replace or soften seller exposure and offers advantages such as a cleaner exit for sellers and direct recourse against the insurer. Buy‑side policies allow the buyer to claim directly against the insurer, while sell‑side policies reimburse the seller.

Typical Exclusions

Even with W&I insurance, some risks remain uncovered. Common exclusions include fraud, known issues not disclosed in due diligence, underfunded pension liabilities and forward‑looking warranties. Buyers may negotiate special indemnities or increase caps to cover these gaps.

Claim Process: Trigger to Payment

A clear claim process reduces disputes and speeds resolution. Based on practical guidance from Cranfill Sumner and Morgan & Westfield, the typical flow is:

1. Trigger event: A specific liability arises (e.g., a tax audit or lawsuit).
2. Investigation: Buyer checks whether the loss is covered by the indemnity, preserves documents and calculates damages.
3. Notice: Buyer sends a written claim to the seller within the specified time, including details, supporting documents and relevant contract clauses.
4. Defence and negotiation: Parties negotiate; the seller may assume the defence or appoint counsel. Negotiation may involve escrows, set‑offs or settlement discussions.
5. Payment or offset: If liability is confirmed, payment is made from escrow or via direct reimbursement. If the seller fails to pay, the buyer may offset against deferred consideration or pursue litigation.

To visualise this process, you can think of it as an arrow: Trigger → Investigation → Notice → Defence & Negotiation → Payment/Offset.

A Founder’s Checklist Before Signing

Selling a company is demanding. Use this checklist to prepare:

• Organise your data room: Upload corporate records, share registers, Articles of Association, contracts, IP assignments and employment agreements. Undo Capital’s investor‑ready data room guide shows you how to structure materials and manage access.
• Complete your due diligence cleanup: Ensure taxes are filed, intellectual property is assigned to the company and employment matters are settled.
• Understand share structure: If you anticipate issuing different share classes pre‑sale, read Undo’s share classes explained for the basics.
• Prepare your pitch: Though not directly related to a sale, a clear narrative helps attract buyers. See our compliant pitch deck for SEIS/EIS investors.
• Review early‑round structures: Your first investment round can affect later exits, which influence future indemnity negotiations.
• Document disclosures: Keep a clear log of all matters disclosed to the buyer. Provide copies of correspondence and board minutes to reduce the likelihood of claims.

Discuss W&I insurance: Assess whether a buy‑side policy could cap your exposure and accelerate payment of the purchase price. Premiums are modest compared with potential liabilities.

Next Steps

Indemnities are a core part of selling a business. They allocate specific risks back to the seller and can materially affect purchase price, escrow amounts and the length of exposure. To negotiate effectively:

• Understand definitions: Clarify the indemnity meaning and the differences between indemnities and warranties.
• Tailor clauses: Define scope, notice, control and payment mechanics in each indemnification clause. Use clear language to avoid disputes.
• Use negotiation levers: Caps, baskets, time limits and knowledge qualifiers can dramatically reduce exposure. Keep market benchmarks in mind: median caps around 10% and survival periods of 12–18 months.
• Consider W&I insurance: A well‑priced policy can limit exposure to as little as 0.3 % of the purchase price.
• Prepare early: Organise your due diligence, fix issues, and engage advisers. Undo Capital’s tools, from data rooms to cap table management, can help you stay organised and investor‑ready.

Undo Capital does not replace legal counsel. What it does is help founders maintain clean records, accurate share issuances, and structured governance from day one. That reduces friction in diligence and strengthens your negotiating position around caps, baskets, and time limits. Start by making sure your cap table, share documentation, and historical filings are complete.