In M&A transactions, representations and warranties (“reps and warranties” or “R&Ws”) often get treated as standard contract language. But for sellers, these clauses have real teeth—and real consequences. They allocate risk, drive post-closing liability, and shape the buyer’s perception of the business. Poorly negotiated reps and warranties can diminish deal value, extend escrow periods, or trigger costly indemnity claims.
At Linden Law Partners, we represent business owners throughout Colorado and beyond, often in life-changing business exits. We’ve seen firsthand how representations and warranties that seem standard during negotiations can become pivotal months or years later.
Reps and warranties are statements made by the seller (and sometimes the buyer) about the business being sold. Their purpose is twofold:
These statements typically appear in a dedicated section of the purchase agreement or merger agreement. A breach of a representation and warranty can allow the buyer to seek compensation, reduce payment, or even unwind the deal in extreme cases.
If you’re selling your company, reps and warranties can significantly impact the amount of money you keep post-closing. Many sellers mistakenly assume that they’re in the clear once a deal closes. In reality, the seller’s representations and warranties live on through a specified survival period—and serve as a basis for post-closing liability.
Sellers need to proactively manage this risk—not just rely on boilerplate language.
Typically cover a wide range of business areas, such as
While general representations typically follow a standard profile, their classification isn’t set in stone. In practice, buyers may push to reclassify certain general reps as fundamental based on the perceived risk profile of the target. For example, although employment practices are usually treated as general representations, if the seller has a complex or problematic employment history—such as high exposure to wage-and-hour claims or pending employee disputes—the buyer may negotiate to elevate that rep to a fundamental one. This dynamic can apply to virtually any rep category, making it critical for sellers to assess how the unique risk contours of their business could impact rep classification and survival.
Typical Survival: 12–18 months post-closing
Subject to: Indemnification caps, baskets, and materiality scrapes
Touch core elements of the deal:
Typical Survival: 3–6 years or indefinite
Subject to: Higher caps or no cap at all
Fundamental representations and warranties receive heightened scrutiny and longer survival periods because they go to the heart of the transaction. These are the deal-breaker reps—statements so essential that, if untrue, the buyer likely wouldn’t have proceeded with the acquisition at all. They’re deemed “fundamental” because they speak to core elements of the bargain itself: ownership, authority, tax status, and other issues that fundamentally underpin the value and legality of the deal.
Don’t assume the labels “general” and “fundamental” are fixed categories—buyers often try to expand what’s considered fundamental based on perceived risk. Buyers will often seek to expand the definition of fundamental reps to cover areas of concern uncovered during diligence. Sellers must evaluate rep classification not just from a legal standpoint, but through the lens of deal psychology and negotiation leverage. Anticipating which reps may be targeted for elevation—and proactively narrowing their scope or building in protective qualifiers—can meaningfully limit post-closing exposure.
Below are the most common rep categories found in M&A transactions:
Sellers often seek to limit the scope of their representations by tying them to their knowledge—an important risk allocation tool that can shield against liability for unknown or unknowable issues. A knowledge qualifier effectively says: “To the best of my knowledge, this statement is true,” rather than guaranteeing it in absolute terms.
There are generally two types of knowledge qualifiers:
In negotiations, buyers typically seek broader constructive knowledge definitions, and may attempt to define “knowledge” to include the knowledge of an entire category of individuals (e.g., all officers, directors, or key employees). This approach significantly expands the seller’s exposure.
Overly broad knowledge qualifiers can turn what was meant to be a factual statement into a trap for the seller. Negotiating tight definitions of knowledge, and applying them only where truly appropriate, is essential to managing post-closing risk.
Materiality scrapes are buyer-favored provisions that effectively ignore materiality qualifiers when determining whether a rep has been breached and/or when calculating damages resulting from that breach.
There are two types of scrapes:
1. Scrape for Breach: Materiality is disregarded in deciding whether a breach occurred.
2. Scrape for Damages: Materiality is disregarded when measuring the financial impact of the breach.
In the absence of a scrape, a rep that states “no material adverse effect has occurred” would require the buyer to prove materiality before asserting a breach. But if a materiality scrape is in place, even immaterial deviations could constitute a breach and potentially support an indemnification claim.
According to the 2024 SRS Acquiom Deal Terms Study:
Buyers argue that materiality scrapes are appropriate because:
Sellers, however, should be cautious. Overly aggressive scrapes can convert harmless or trivial issues into compensable breaches, undermining the utility of baskets and potentially triggering disproportionate indemnity claims.
Materiality scrapes are one of the more subtle traps in M&A contracts. Their impact can be outsized—especially in deals where minor operational or financial issues are used post-closing to chip away at escrow funds.
In M&A deals, reps and warranties don’t exist in a vacuum. Their real impact is shaped by the economic and time limits placed on them through the indemnification framework. That includes survival periods, maximum liability caps, baskets, and—increasingly—reps and warranties insurance (RWI). Each element can either protect the seller from future claims or leave the door open to post-closing exposure. Understanding how these tools interact is critical to negotiating fair and market-aligned outcomes.
Survival periods define how long the representations and warranties survive post-closing—that is, how long the buyer has to bring a claim if one of them proves inaccurate.
These timelines reflect the perceived importance of each rep. General representations and warranties are meant to cover routine matters and are expected to “expire” fairly quickly. Fundamental reps, by contrast, go to the heart of the deal—and buyers expect longer tails to match their gravity.
Sellers should negotiate to limit survival periods as much as possible. A shorter clock means less time for buyers to bring claims, reducing the uncertainty that can linger post-closing and giving sellers more confidence in the finality of the deal.
Indemnity caps limit the total liability a seller can face for breaches of reps and warranties (other than for fraud or breaches of certain fundamental reps, which are sometimes uncapped).
Typical benchmarks:
Buyers often argue that caps should reflect the perceived risk of the transaction and the size of the deal. Sellers should counter by focusing on the completeness of their disclosures, the extent of diligence conducted, and alignment with prevailing market norms.
Pro Tip: Indemnification caps should apply only to the specific representations and warranties covered by the cap. Caps should not apply to claims based on fraud, intentional misconduct, and breaches of covenants, which are typically carved out and addressed separately from representations and warranties. Sellers should also watch attempts by buyers to blend or stack caps across categories—such as combining general rep caps with tax of covenant-related liability—which can erode the negotiated liability protections the seller seeks.
Baskets function like deductibles in insurance—they require that damages exceed a certain threshold before the buyer can make a claim for indemnification.
Two primary types:
According to recent market studies, tipping baskets are more common, especially in mid-market and private equity-backed deals.
Typical ranges:
Sellers should push for deductible baskets wherever possible, as they offer greater protection from small claims and preserve the threshold as a meaningful buffer. If agreeing to a tipping basket, consider negotiating a higher threshold or carve-outs for de minimis claims.
RWI has become a defining feature of modern M&A practice, especially in deals involving private equity sponsors. It allows buyers to obtain coverage from a third-party insurer for breaches of reps and warranties, significantly altering the risk landscape for sellers.
Key points:
While RWI can be seller-friendly, it’s not a cure-all:
When buyers propose RWI, sellers should insist on a “no survival” deal for general reps and push for minimal escrow or retention obligations. However, they must still carefully review and negotiate the scope and accuracy of the reps, as insurers often reserve rights or deny coverage for issues that were not properly disclosed or diligenced.
Disclosure schedules are arguably the most important tool sellers have to protect themselves from post-closing indemnification claims. While the reps and warranties outline what is true about the business, the disclosure schedules carve out exceptions—effectively saying, “this rep is true, except as disclosed here.”
For sellers, disclosure schedules serve three essential purposes:
1. Limit liability by flagging known exceptions
2. Clarify reps through added context or specificity
3. Preserve deal momentum by acknowledging imperfections without halting progress
Disclosure schedules often include:
Even small errors or omissions can undo negotiated protections. For example, disclosing a key customer dispute in a data room isn’t enough if it isn’t also called out in the schedule tied to the “Litigation” rep. Courts and insurers will rely on what's in the contract, not what was implied or shared informally.
Think of disclosure schedules as your legal safety net. A carefully drafted schedule can neutralize deal risk that would otherwise fall squarely on the seller. Don’t treat them as an afterthought or clerical exercise—they’re a core component of your post-closing defense strategy.
Sellers can meaningfully reduce post-closing risk by negotiating smarter around reps and warranties. Key strategies include:
A seller delivered financials prepared by a part-time controller. A revenue accrual error went undiscovered until after closing. This created a breach of the financial statements representation and exposed the seller to indemnification liability. A narrower rep or a well-drafted disclosure would have avoided the issue.
The seller failed to disclose a $20,000 payable. The applicable rep stated that all material A/P had been disclosed. In context, $20,000 wasn’t material to the deal. However, the agreement included a double materiality scrape, which stripped out all materiality qualifiers—both for determining breach and calculating damages. That allowed the buyer to treat the rep as if it required disclosure of all A/P, no matter how minor. Result: the buyer successfully claimed the full $20,000.
A seller listed all customer complaints in the disclosure schedules, even minor ones. Months later, the buyer claimed misrepresentation when a key customer canceled. Because the prior complaints were disclosed, the buyer’s claim was dismissed.
Representations and warranties are not boilerplate—they’re one of the most legally and financially consequential parts of any M&A deal.
For sellers, understanding how they work, negotiating the right limitations, and thoroughly disclosing known issues can mean the difference between preserving the value of your sale—or watching it erode through post-closing indemnification claims.
At Linden Law Partners, we don’t just paper deals—we strategize, negotiate, and protect. If you’re preparing to sell your business, we’ll help ensure your representations and warranties are properly scoped, your risk is contained, and the value of your hard-earned exit stays intact.
Linden Law Partners is a Denver-based corporate and M&A law firm representing entrepreneurs, founders, and business owners for the formation, financing, and sale of their companies. With nearly 25 years of experience negotiating high-stakes M&A deals, we specialize in sell-side advocacy that blends legal precision with real business strategy.
Call us at: (303) 731-0007
Email: [email protected]
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