What Reps and Warranties Cover
Standard R&W sections in a lower middle market purchase agreement include:
- Financial statements — Accuracy of historical financials, absence of undisclosed liabilities
- Taxes — All taxes have been filed and paid; no open audits or disputes
- Contracts — Material contracts are valid, in force, and not in default
- Intellectual property — Company owns or properly licenses all IP used in the business
- Employees — No discrimination claims, wage violations, or undisclosed employment agreements
- Environmental — No known contamination or regulatory violations
- Litigation — No pending or threatened claims the seller is aware of
- Compliance — Business operates in compliance with applicable laws and regulations
Indemnification
If a rep turns out to be inaccurate — a tax liability surfaces, a customer sues over a pre-close issue, an employee files a wage claim — the buyer can recover from the seller under the indemnification provisions. Key parameters:
- Basket (deductible) — A minimum threshold before the seller owes anything (typically 0.5%–1% of deal value)
- Cap — Maximum seller exposure (typically 10%–20% of deal value for general reps; unlimited for fraud or fundamental reps)
- Survival period — How long after close the buyer can make claims (typically 18–24 months for general reps)
R&W Insurance
Reps and Warranties Insurance (RWBI) is a policy — typically bought by the buyer — that covers indemnification claims arising from breached representations. It's become standard in transactions above $20M and is increasingly used in $10M–$20M deals.
R&W insurance benefits sellers significantly: it shifts indemnification risk to the insurer rather than the seller's personal assets, enables cleaner escrow arrangements (or no escrow), and allows seller proceeds to be distributed to owners at close rather than held for 18+ months. The buyer pays the premium (typically 2%–4% of coverage), but this cost is often factored into price negotiations.
What's Your Business Worth Today?
A 30-minute confidential conversation gives you a realistic valuation range — and clarity on the factors that are moving your multiple up or down.
Request a Free Valuation