Indemnity cap

Without a cap, a seller who has already spent the sale proceeds could theoretically face open-ended exposure for problems a buyer discovers years later. A cap gives both sides a known, negotiated ceiling — the seller can plan around it, and the buyer can underwrite realistically what recovery is actually available if something goes wrong.

What a cap actually protects

A cap is usually set as a portion of the purchase price and applies to the pool of ordinary representation and warranty claims — the operational, financial and compliance statements the seller made about the business. It is a ceiling on that pool, not a guarantee that any given claim will be paid up to that amount.

The mistake people actually make

Treating "the cap" as a single number that limits everything. In practice, purchase agreements routinely carve certain claims out of the cap entirely — fraud, breaches of core ownership and authority representations, and unpaid taxes are common exclusions — so an effectively uncapped tail of exposure often survives even where a headline cap is agreed. The real negotiation is the carve-out list, not the headline figure.