When it comes to buying or selling a small business, liability buckets can make or break the deal. These carefully crafted provisions allocate risk and responsibility for specific issues that might arise post-closing. Far from being just legal jargon, liability buckets are critical tools that help buyers and sellers agree on how potential problems will be handled.
What Are Liability Buckets?
In any M&A deal, not all risks are created equal. Liability buckets divide risks into categories, each with its own terms for survival periods, caps, and indemnification. For example:
• General Bucket: Covers typical reps and warranties, like financial statements and operational disclosures. These often have lower caps and shorter survival periods.
• Fundamental Bucket: Includes key issues like ownership, authority, and tax compliance. These buckets typically have no cap or significantly higher caps.
• Specific Buckets: Reserved for high-risk items like pending litigation, unresolved tax audits, or regulatory compliance issues, with tailored protections.
Why They Matter in SMB Deals
Liability buckets aren’t just for mega-corporate transactions. They’re especially important in small business acquisitions, where issues like:
• Pending litigation
• Misclassified employees
• Missing licenses or permits
can create significant risks. For example, litigation might be placed in a specific bucket with a higher cap, reflecting the real financial exposure for the buyer. Meanwhile, fundamental reps like title to assets may remain uncapped to ensure basic deal security.
What Should Sellers Watch For?
Sellers often focus on the big picture—price and terms—but liability buckets are where the details live. Key considerations include:
• Caps: Are they reasonable and specific to the risks?
• Survival Periods: Do they align with the practical timeline for discovering potential issues?
• Disclosure: Are all potential liabilities disclosed upfront to limit post-closing surprises?
How Buyers Use Liability Buckets
Buyers rely on these buckets to tailor their risk exposure. For example, if a business has pending litigation, a buyer may request a separate indemnification bucket for that issue, ensuring it doesn’t affect general liabilities.
The Bottom Line
Liability buckets are about balance—protecting both buyers and sellers by creating clear boundaries for risks. Getting them right means fewer surprises post-closing and a smoother transition for everyone involved.
At Recalde Law Firm, P.A., we help clients navigate the complexities of liability allocation, ensuring your deal terms align with your goals. Whether you’re a buyer or seller, we’ll guide you through the process to manage risks and close with confidence.
Reach out today to get started.
