If you are a founder or owner of a small business who has received a letter of intent or purchase offer, the terminology can feel overwhelming. Below is a plain-language explanation of each key deal term featured in our calculator, written to help you understand what buyers are asking for and why it matters to you as a seller.
An earnout is a portion of the purchase price that is not paid to you at closing. Instead, it is paid to you in the future — typically over one to three years — but only if the business hits certain financial milestones after the sale. Common milestones include achieving a target level of revenue, EBITDA, or gross profit in the years following the transaction.
Rollover equity means that instead of receiving 100% cash at closing, you "roll over" a portion of your ownership stake into equity in the new combined entity or the buyer's holding company. In practical terms, you are reinvesting a slice of your proceeds back into the deal alongside the buyer — most commonly a private equity firm — and retaining a minority ownership interest going forward.
An indemnification escrow is a portion of the purchase price that is held back at closing by a neutral third-party escrow agent. The funds are not paid to you immediately — they are held in escrow for a defined period (typically 12 to 18 months) to serve as a ready source of funds if the buyer discovers a problem with the business after closing that you were responsible for under the representations and warranties in the purchase agreement.
Working capital refers to the day-to-day operating funds of the business — essentially current assets minus current liabilities. In nearly every M&A transaction, the parties agree on a "target" level of working capital that the business should have at closing. The idea is that the buyer is acquiring a going concern and expects a normal level of operating liquidity to be included in the deal at no extra cost.
A working capital escrow is a relatively small amount of money held back at closing to settle any dispute over whether the actual working capital delivered at closing matched the agreed target. After closing, both parties finalize a closing balance sheet. If actual working capital was lower than the target, the buyer is compensated from the escrow. If actual working capital exceeded the target, the excess is returned to you.
Both a deductible basket and a tipping basket are threshold mechanisms in the indemnification section of a purchase agreement. They set a minimum dollar amount of losses that must be accumulated before the seller has any indemnification obligation to the buyer. They exist to prevent the buyer from making frivolous or trivial claims for minor issues that arise after closing.
Deductible basket: Works like a car insurance deductible. You as the seller are only responsible for losses that exceed the basket threshold. If the basket is $250,000 and the buyer has $400,000 in losses, you owe only $150,000 — the amount above the threshold. The seller retains the "first dollar" of losses up to the basket amount permanently.
Tipping basket (also called a "threshold" or "dollar one" basket): Works differently. The threshold must still be crossed before any claim can be made, but once cumulative losses exceed the basket amount, the seller owes the full amount of losses from dollar one — not just the excess. Using the same example: if the basket is $250,000 and the buyer has $400,000 in losses, the buyer can recover the entire $400,000 once the threshold is crossed.
In every purchase agreement, the seller makes a long list of representations and warranties — essentially statements of fact about the business that the buyer is relying on to make the purchase. These representations are divided into two categories with very different legal treatment.
General representations are the everyday business representations: that the financial statements are accurate, that there is no undisclosed litigation, that key contracts are in full force and effect, that there are no material environmental issues, and so on. General reps are subject to the indemnification basket, the general rep indemnity cap, and a shorter survival period. They are important, but they expire relatively quickly.
Fundamental representations cover the most foundational facts of the deal: that you actually own the business, that you have the authority to sell it, that the capitalization table is accurate, that there are no undisclosed equity interests, and that there are no brokers with undisclosed fee rights. Fundamental reps survive for a much longer period and are often subject to a higher or unlimited indemnification cap. They are treated with heightened seriousness because a breach of a fundamental rep could mean the buyer did not actually get what it paid for.
The general representation cap is the maximum dollar amount that you as the seller can ever be required to pay for indemnification claims arising from breaches of your general representations and warranties. It is a ceiling on your exposure for ordinary rep and warranty claims.
The overall cap on seller indemnity is the absolute maximum total amount you can be required to pay across all indemnification claims of any type — general reps, fundamental reps, tax claims, and any other specified indemnities. It is the outer ceiling on your total post-closing financial exposure.
The general rep survival period is the length of time after closing during which the buyer can bring an indemnification claim based on a breach of your general representations and warranties. Once the survival period expires, the buyer loses the right to make new claims for general rep breaches — even if the breach is later discovered.
The fundamental rep survival period is the length of time after closing during which the buyer can bring an indemnification claim for a breach of your fundamental representations and warranties. Because fundamental reps cover foundational matters like ownership, authority, and capitalization, the law and market practice both allow buyers to insist on a much longer survival period than for general reps.
The Letter of Intent (LOI) exclusivity period is a provision in the letter of intent — the preliminary agreement that precedes a formal purchase agreement — that requires you as the seller to stop negotiating with, soliciting, or entertaining offers from any other potential buyers for a defined period of time. During this window, you have effectively agreed to deal exclusively with the buyer who submitted the LOI.