Published July 05, 2011

What are Baskets and Caps?

By Clay Brock

In the legal documents for a small business acquisition, a seller will make certain representations and warranties (defined on our website) regarding the business.  For instance, he might represent that the business's inventory is of merchantable and usable condition.  If it turns out that some of the inventory is obsolete, the buyer might have a claim against the seller.  Baskets and caps establish limits on the amount a buyer can claim against a seller for certain claims of indemnification.

An indemnification ‘cap' limits the overall liability of the seller to some dollar amount.  Typically, small market transactions have caps equal to 50% of the purchase price.  These caps also usually exclude certain key representations and warranties (i.e. the cap does not apply) such as ownership, authority to enter into the sale transaction, etc.

A ‘basket' establishes a threshold under which the buyer cannot make a claim against the seller.  In small market transactions the basket amount is usually 0.5% of the purchase price and the basket is a ‘first-dollar' basket.  In the case of a transaction with $5 million purchase price this means the basket would be $25,000.  In this case, if there were claims totaling $20,000, the buyer could not make a claim against the seller because the $25,000 threshold had not yet been reached.  But if the claims totaled $30,000 the buyer could make a claim from the ‘first-dollar:' that is for the entire $30,000.

Baskets and caps are just one part of the definitive legal agreements that formally document a transaction, but they're useful to understand.

Clay Brock - General Partner

Clay made his first small company investment in the late 90’s and never looked back, joining forces with Scott in 2004 to raise Hadley Capital Fund I. Over the past twenty years he has worked closely with nearly a dozen small companies on growth and improvement initiatives.

Clay currently works with Storflex, and previously served as chairman of the board of directors for Bluff Manufacturing and SGA Production Services, both former Hadley Capital companies.

Clay is the firm’s annual leader in vertical feet skied, a competitive cyclist and an instrument-rated pilot. He is also actively involved in a number of community and non-profit organizations.

Clay received a degree in English from Gettysburg College and his MBA from the University of Chicago. He and his wife Amy have three children, and a black lab named Dexter.