What Are Representations and Warranties in an Acquisition Agreement and What Happens If I Get Them Wrong?

You have negotiated the purchase price. The Letter of Intent (LOI) is signed. Due diligence is moving forward. Everyone is talking about closing dates and transaction logistics.

Then the acquisition agreement arrives.

It is dozens of pages long and filled with detailed statements about your company. The buyer wants you to confirm that your financials are accurate, your intellectual property belongs to the business, your contracts are enforceable, and there are no undisclosed problems lurking beneath the surface.

Many founders assume these provisions are routine legal language. That assumption can become expensive.

Representations and warranties often determine whether a founder keeps acquisition proceeds after closing or spends the next two years defending indemnification claims. While valuation receives most of the attention during negotiations, representations and warranties frequently become the provisions that create the greatest post-closing risk.

Understanding them before signing is essential.

Understanding Representations And Warranties

Representations and warranties are factual statements the seller makes about the condition of the company at signing and, in many cases, at closing.

These statements commonly cover areas such as:

• Capitalization and ownership
• Financial statements
• Material contracts
• Intellectual property
• Employment matters
• Regulatory compliance
• Litigation history
• Tax obligations

The buyer relies on these statements when deciding whether to complete the transaction.

If a statement later proves inaccurate, the consequences may extend well beyond an awkward conversation.

The buyer may have contractual remedies.

Why Accuracy Matters So Much

Many founders view representations and warranties as disclosures. Legally, they are more than that.

They are promises about the company’s condition.

For example, imagine a founder represents that all the company’s intellectual property has been properly assigned to the business.

Six months after closing, the buyer discovers a key contractor never signed an intellectual property assignment agreement.

Suddenly, the buyer may argue that the representation was inaccurate. That claim can trigger indemnification rights.

The issue is not whether the founder intended to mislead anyone.

The issue is whether the statement was correct when made.

Indemnification Is Where Financial Risk Appears

The most significant consequence of a breached representation is usually indemnification.

Indemnification is the obligation to reimburse another party for losses arising from a contractual breach.

In acquisition transactions, common claim areas include:

• Undisclosed liabilities
• Tax issues
• Intellectual property ownership problems
• Employee classification disputes
• Contract violations
• Regulatory compliance failures

If the buyer experiences losses connected to one of these issues, they may seek recovery under the indemnification provisions.

This is why founders should pay close attention to representations long after negotiating valuation.

A strong purchase price does not matter much if significant amounts must later be repaid.

Escrow Accounts Often Hold Part Of The Purchase Price

Many acquisition agreements include an escrow arrangement. Under this structure, a portion of the purchase price remains with a third party for a defined period after closing.

The purpose is straightforward.

If indemnification claims arise, funds may already be available to satisfy those claims.

Escrow periods commonly last between 12 and 24 months, although the timing varies by transaction.

Founders sometimes focus entirely on the headline acquisition value and overlook how much money remains tied up after closing.

The amount available immediately and the amount potentially exposed to claims are often very different numbers.

Disclosure Schedules: One Of The Most Important Documents In The Deal

Many founders spend months negotiating valuation and only a few hours reviewing disclosure schedules. That is often backwards.

Disclosure schedules allow sellers to identify known exceptions to representations and warranties.

For example:

• A pending contractor dispute
• An unresolved tax issue
• An expired license
• A customer disagreement
• A missing intellectual property assignment

If properly disclosed, the buyer generally cannot later claim they were unaware of the issue.

In many transactions, disclosure schedules become the seller’s primary protection against future indemnification claims.

The quality of the schedules frequently matters as much as the quality of the acquisition agreement itself.

Survival Periods Continue The Risk After Closing

Many founders assume representations expire when the transaction closes. That is rarely the case.

Most acquisition agreements include survival periods that determine how long the buyer can bring claims after closing.

General representations often survive:

• 12 months
• 18 months
• 24 months

Certain categories may survive considerably longer, including:

• Fraud claims
• Tax matters
• Intellectual property ownership issues

The survival period effectively extends the risk window beyond closing.

Founders should understand exactly how long those obligations remain active.

Indemnification Caps And Baskets Affect Exposure

Not every claim automatically results in payment. Many agreements include negotiated limitations such as:

• Indemnification caps
• Deductibles
• Baskets

A basket functions similarly to a threshold amount that claims must exceed before recovery becomes available.

An indemnification cap limits the maximum recovery amount available for certain categories of claims.

These provisions can significantly affect a founder’s post-closing exposure.

Two transactions with identical purchase prices may create very different risk profiles depending on how these provisions are negotiated.

Representations And Warranties Insurance Is Becoming More Common

Representations and Warranties (R&W) insurance has become increasingly common in middle-market transactions and larger acquisitions.

The policy generally shifts certain indemnification risks from the seller to an insurance carrier.

Benefits may include:

• Reduced escrow requirements
• Lower post-closing exposure
• Faster claim resolution
• Cleaner exits for sellers

Not every transaction uses R&W insurance, but founders involved in larger deals should understand whether it is part of the buyer’s proposed structure.

Common Founder Mistakes

• Treating Representations As Standard Boilerplate: Many founders focus on valuation and assume legal language is largely routine. Every representation is a factual statement that may create liability if inaccurate. Careful review matters.
• Underinvesting Time in Disclosure Schedules: Disclosure schedules often provide the strongest protection against future claims. Founders who rush through them may leave avoidable risks unresolved. Thorough disclosures frequently prevent future disputes.
• Ignoring Survival Periods and Indemnification Limits: Closing does not necessarily end liability exposure. Understanding how long claims survive and how recovery is limited is critical. These provisions directly affect post-closing risk.
• Assuming Counsel Can Fix Unknown Problems: Lawyers can draft protections based on available information. They cannot disclose issues they do not know exist. Internal diligence remains essential.

10 Minute Acquisition Agreement Self Check

Before signing an acquisition agreement, ask:

• Have all representations been reviewed carefully?
• Are disclosure schedules complete?
• Has intellectual property ownership been confirmed?
• Are unresolved liabilities documented?
• Do you understand the survival period?
• Have indemnification caps and baskets been negotiated?
• Has legal counsel reviewed both the agreement and disclosure schedules?

If several answers remain unclear, additional review may be worthwhile before signing.

The Most Expensive Acquisition Problems Often Appear After Closing

Many founders believe negotiation risk ends once the purchase price is finalized.

In reality, representations and warranties often determine how much of that purchase price remains yours after the transaction closes.

A carefully prepared disclosure process can prevent years of disputes and protect the value you worked to create.

Preparing For A Future Exit And Want To Avoid Costly Deal Mistakes?

Our next free session, June 9, 2026, covers the three fundraising blind spots that cost founders leverage: diligence preparation, term sheet mechanics, and board control. We will also discuss hidden deal terms that can create unexpected risk, explain how governance decisions affect negotiating power, and share the practical checklist founders use to avoid ownership, diligence, and cap table issues before major transactions.

Reserve your seat: https://howtoraisevcround.com/how-to-raise-priced-round-2

Sources Used

• [Representations and Warranties in M&A Transactions](https://www.sec.gov/cgi-bin/browse-edgar?action=getcompany) — U.S. Securities and Exchange Commission, sec.gov
• [What Founders Need to Know About M&A Indemnification](https://www.ycombinator.com/library) — Y Combinator Library, ycombinator.com/library
• [R&W Insurance in M&A: What Buyers and Sellers Need to Know](https://hbr.org) — Harvard Business Review, hbr.org
• [M&A Deal Terms and Indemnification Trends](https://www.srsacquiom.com/resources/ma-deal-terms-study) — SRS Acquiom M&A Deal Terms Study, srsacquiom.com