For most business owners, the closing of an M&A transaction feels like the finish line. The wire transfer hits, the handshakes happen, and the company you spent years building belongs to someone else. But in transactional law, closing is not always the end—it can be the beginning of a period of continued financial exposure if the deal documents are not negotiated carefully.
What Are Representations and Warranties?
In a purchase agreement, the seller makes a series of representations and warranties—formal statements of fact about the business being sold. These cover everything from the accuracy of financial statements and the absence of pending litigation to the validity of contracts, the status of intellectual property, compliance with applicable laws, and the condition of material assets. Most purchase agreements require sellers to certify that these statements are true and accurate as of both the date of signing and the closing date.
The Indemnification Obligation
If any of your representations or warranties turn out to be inaccurate—whether because of an honest mistake, an undiscovered liability, or something that occurred before closing, the buyer often has a right to seek indemnification from you. This means the buyer can come back after the deal closes and seek monetary compensation for the loss caused by the breach. Depending on how the purchase agreement is structured, this exposure can persist for months or years after closing and can involve substantial sums.
Key Protections to Negotiate
The primary seller-side protections in this context are the basket (sometimes called a deductible), the cap, and the survival period. The basket establishes a minimum threshold of losses a buyer must suffer before they can make an indemnification claim against you—small claims below the basket amount are, in effect, the buyer’s problem. The cap limits the total amount you can be required to pay in indemnification, typically expressed as a percentage of the purchase price. The survival period establishes how long after closing the buyer can bring a claim for a breach of a particular representation.
Sellers should push for a short survival period on general representations (often 12 to 18 months), a meaningful basket, and a cap no greater than 10 to 15 percent of the purchase price for general reps—though fundamental representations (those covering title, authority, and capitalization) and fraud carve-outs often survive longer and are not subject to the cap.
Representation and Warranty Insurance
In a growing number of mid-market transactions, representation and warranty insurance (RWI) has become a practical solution to the tension between buyer protection and seller certainty. RWI is a policy—typically purchased by the buyer—that covers losses arising from breaches of the seller’s representations, shifting liability from the seller to the insurer. For sellers, this can dramatically reduce post-closing exposure and in some cases allow for a full distribution of sale proceeds at closing rather than holding funds in escrow.
Understanding your post-closing exposure before you sign a purchase agreement is not optional—it is essential. At Beresford Booth we can help you negotiate representation and warranty provisions that protect both the integrity of the deal and your financial security long after the closing table is in the rearview mirror. Contact us at info@beresfordlaw.com or by phone at (425) 776-4100 to see how we can help.