“Reps and warranties are often one of the most heavily negotiated parts of a business sale agreement, and it’s critical for sellers to carefully understand the implications of these.”
-Shruti Gurudanti, Rose Law Group partner and director of corporate transactions
By CRC Group
The representations and warranties put forth by a seller are critical components of business mergers and acquisitions (M&A). In a traditional M&A transaction, the seller agrees to indemnify the buyer for a set period of time against breaches of their representations and warranties. The indemnity is often backed by an escrowed portion of the proceeds otherwise payable at closing. This usually amounts to around 10% to 15% of the proceeds for 1 – 2 years. However, the emerging use of representations and warranties insurance is changing or eliminating this traditional structure for many M&A deals (source 1).
Fifteen years ago, many attorneys handling M&A transactions didn’t see a need for representations and warranties coverage, but that recommendation has begun to shift. Organic growth has been limited for most companies over the last few years, resulting in a subsequent uptick in the volume of M&A activity as companies seek to create value through strategic mergers or acquisitions. During the first quarter of 2022, the U.S. technology services sector accounted for the largest share of U.S. M&A transactions, but M&A activity is also on the rise in the financial arena, healthcare, and a spectrum of other industries across the country.3
