Deal Mechanics: Tipping Baskets
Last week I covered a topic for beginners, so this week I’m going to touch on something a little more advanced.
In every business deal, there’s the part where the buyer and seller agree on a price (typically, in the LOI stage).
Then there’s the part where the buyer and seller try not to get burned (typically fought over by lawyers in the purchase and sale agreement).
Today, let’s talk about tipping baskets - one of those friendly-sounding legal tools that is often overlooked by buyers and sellers… right until they wish they hadn’t.
What is a Tipping Basket?
In the world of M&A, most purchase agreements include representations (reps) and warranties. These are essentially promises the seller makes about the business - what it owns, what it owes, and what kind of skeletons aren’t in the closet.
But what happens when one of those promises turns out to be untrue?
That’s where indemnification comes in: if something goes sideways post-closing due to a broken rep, the seller may need to reimburse the buyer for the damage. This could be anything from from outright fraud, to unintentional tax/accounting errors, to a cranky customer who wants to return an item they bought prior to closing.
Some of these items are a big deal, and some of them, well… let’s just say it’s part of doing business.
Enter the tipping basket - a structure that acts kind of like an insurance deductible.
It says: “Hey buyer, we’re not going to nickel-and-dime the seller over a $75 missed invoice. But if the total hits, say, $50,000… now we’re talking.”
There are two kinds of baskets:
Deductible Basket: Buyer only recovers the amount above the threshold (preferred by sellers, more common in larger M&A deals).
Tipping Basket (today’s focus): Once the threshold is exceeded, the entire amount becomes claimable. It “tips”. Think of a bucket filling up with water. When it’s full, it tips over and everyone gets soaked. (preferred by buyers, and more common in lower/middle-market deals)
What’s Typical?
Tipping basket are usually expressed as a percentage of purchase price, typically ranging from 0.5% to 1%.
So on a $10 million deal, the tipping basket might be $50-100k.
Below that threshold? The buyer eats the loss.
Above it? The seller’s on the hook for the full amount.
Baskets, in general, are less common in smaller deals. The percentage threshold may be a little bit higher, but the net dollars are lower.
Why Use One?
The logic is sound:
Sellers don’t want to be sued over every squeaky hinge.
Buyers don’t want to absorb real losses over broken promises.
The tipping basket creates a buffer to prevent either party from wasting time and energy on small, inevitable imperfections. At the end of the day, if you’re buying a business surprises are bound to come up. And most of them are relatively harmless and unintentional. It’s just part of what you get when you play the game.
But like most clever legal tools, it works best when everyone knows what they’re doing.
Where It Goes Sideways
In smaller deals (especially under $1M) these baskets are less common. That’s not to say they’re inappropriate… just that they often cause more confusion than they’re worth.
The problems usually fall into three buckets:
Buyers panic: “What’s the seller hiding that they need protection from?” This is especially true when the seller’s lawyer starts off suggesting an inappropriately high threshold.
Sellers miscalculate: “It’s just a standard clause,” says their lawyer - who mostly works on $100M tech exits.
Lawyers fight battles that don’t need fighting: Because good lawyers protect their clients’ interests (and get paid by the hour to do it)
In truth, a well-written agreement - with clear reps, proper disclosures, and reasonable expectations - does more to protect both sides than a fancy basket clause ever could.
So, Should You Worry About It?
If you’re a buyer in a smaller deal and you see a tipping basket, don’t panic. Just ask:
Is this clause proportionate to the deal size?
Is the seller’s lawyer applying a boilerplate from much larger transactions?
Is this really about protection - or just a point of negotiation?
And if you’re the seller, remember:
Over-lawyering can unnecessarily spook a good buyer.
Sometimes the smartest thing you can do is keep it simple.
The Bottom Line:
Tipping baskets are a tool, not a trick. When used wisely, they add clarity and protect both sides from unnecessary squabbles. When used poorly, they create suspicion and slow down deals that should otherwise close.
And if you’re not sure? Call someone who’s read a few more of these than you have (me).
Disclaimer: I am (thankfully) not a lawyer, nor am I an accountant. If any of this sounds like legal/financial advice, it's not. Take everything I say with a grain of salt. But not too much - I hear it's bad for your blood pressure.
