Navigating Representations and Warranties in M&A Deals

Introduction: Contracts Are Not Formalities. They Are Risk Allocation Devices.

In every acquisition I have been a part of, regardless of sector or scale, the real battlefield is not the purchase price. It is the contract. M&A agreements are more than paper formalities. They are the blueprint for post-deal peace or conflict. Representations, warranties, indemnifications, and holdbacks define who bears risk, for how long, and under what circumstances. As a CFO, I see contract law as a form of financial architecture.

Representations and Warranties: Truth as the Starting Line

Representations and warranties (R&Ws) are the seller’s assurances about the state of the business at signing. Common R&Ws include:

• Ownership of shares or assets
• Accuracy of financial statements
• Compliance with laws
• Absence of undisclosed liabilities
• IP ownership and protection

The scope and specificity of R&Ws are critical. In a life sciences deal, our R&Ws included a 12-page schedule detailing FDA regulatory status. That level of precision later helped us trigger an indemnity when we discovered post-close that a filing had lapsed.

Indemnification: The Safety Net Beneath the Representations

Indemnification provisions define how the buyer is compensated if the R&Ws turn out to be untrue. Key considerations include:

• Cap: Maximum liability of the seller
• Basket: Minimum threshold for claims
• Survival period: How long R&Ws remain actionable
• Escrow: Portion of purchase price held back to fund claims

In one Series C acquisition, we negotiated a 10 percent escrow with a 24-month survival period for core R&Ws. That escrow later funded two tax claims and a vendor dispute without litigation.

Holdbacks and Escrow: Protecting the Deal’s Integrity

Holdbacks are portions of the purchase price retained to protect against post-closing risks. They are often used to:

• Cover indemnification claims
• Ensure working capital true-ups
• Align incentives for post-close obligations

In a cross-border acquisition, we structured a tiered escrow: 6 percent general indemnity, 4 percent regulatory milestone, 3 percent IP validation. This tiered approach reduced seller pushback and improved risk targeting.

Disclosure Schedules: Where the Truth Lives

R&Ws are only as good as the disclosures behind them. The seller prepares schedules that carve out exceptions to the R&Ws. For example:

• A claim that “no litigation exists” might be qualified by a schedule listing pending lawsuits
• An IP ownership representation might be limited by a schedule showing licenses

We once avoided a post-close surprise because the disclosure schedule revealed a contingent liability under an old lease that the R&Ws did not mention.

Negotiation Dynamics: Where Legal and Commercial Meet

Contract law is not just legal theory. It is commercial leverage. We often trade narrower R&Ws for longer survival or adjust the escrow size in exchange for specific carve-outs. Smart CFOs know their risk appetite and design contracts accordingly.

In one negotiation, we accepted a lower cap on indemnity but required a reps and warranties insurance policy to fill the gap. That hybrid model closed the deal.

Conclusion: Contracts Are the Operating System of the Deal

A good M&A contract allocates risk clearly, anticipates disputes, and aligns incentives. As CFOs, we must be as fluent in escrow mechanics as we are in revenue forecasts. Because when conflict arises—and it often does—it is not the intent that prevails. It is the paper.

Insight

In nearly every deal I have closed, the tone of post-close dynamics was set not by the mutual goodwill of the parties but by the quality and clarity of the contract. Representations, warranties, indemnification clauses, and holdbacks are not merely legal appendices. They are levers of financial protection and tools for shaping negotiation behavior. I have seen multimillion-dollar conflicts resolved in days because a representation was clear and the indemnification path was defined. I have also seen minor issues drag on for months because the contract lacked precision.

Representations and warranties are often the first place I look to understand the seller’s confidence. When a seller resists including a basic representation—say, that the financials are in accordance with GAAP—I pause. Not to question their integrity, but to test their readiness. Because every word in an R&W section represents a liability or an asset, depending on your side of the table.

In one transaction involving a digital health startup, the target was adamant about limiting R&Ws related to patient data handling. Rather than walk, we requested a supplemental disclosure schedule outlining every data breach incident and ongoing mitigation. That decision, made at the negotiation table, saved us significant regulatory exposure when a breach incident resurfaced three months later. We had disclosure on file. We had negotiated escrow. We had coverage.

Indemnification clauses are where the real defense lies. A contract that lacks teeth on indemnity is like a fire alarm without batteries. It looks good but offers no protection. Over time, we have developed standard settings depending on the deal type. In distressed transactions, we request uncapped indemnity for fraud and regulatory violations. In growth-stage deals, we settle for caps but require longer survival periods.

We once negotiated a 15-month survival for most R&Ws but a 36-month term for tax and IP representations. Sure enough, a legacy payroll tax issue came to light 14 months after close. Without that extended survival, our claim would have been time-barred.

Escrows and holdbacks are the grease in the wheels of post-close resolution. They reduce the need for litigation by offering a pooled source of recovery. In one transaction, we reserved 12 percent of the purchase price in escrow—split into three distinct tiers for general claims, pending litigation, and revenue milestones. This structure created alignment. The seller knew the terms, and we knew the timeline. When a vendor dispute surfaced post-close, we resolved it using the escrow, no lawyers needed.

Disclosure schedules are perhaps the most undervalued component of M&A diligence. They are not footnotes. They are shields. If a seller discloses a lawsuit in the schedule, and we accept it, it is no longer grounds for indemnity. That is why I push hard for thoroughness. In one deal, we extended diligence by three weeks just to complete a full disclosure schedule for all IP ownership. That delay avoided a future argument over patent co-ownership.

Negotiation dynamics around these clauses are delicate. Often, we use them as chess pieces. If the seller wants a lower escrow, we might agree—but only if they broaden the definition of covered claims. If they resist a certain R&W, we propose a tailored reps and warranties insurance policy. The key is not to win every point, but to align risk with where it lives. I once structured a deal where the seller bore almost zero post-close liability. In return, we adjusted price and demanded detailed schedules. That gave them a clean exit, and gave us confidence.

Contract terms should reflect commercial intent, not just legal precedent. If we are acquiring a business for its technology, the contract must cover IP ownership, employee inventions, and code escrow. If we are acquiring for market position, the contract must detail non-competes, customer contract assignments, and exclusivity windows.

The CFO’s role in contract law is not to draft it but to understand its economic implications. How does an indemnity cap affect our downside exposure? How does a survival period influence the risk profile of our balance sheet? How do working capital true-up mechanisms flow through to post-close cash?

In one notable transaction, a poorly defined working capital target resulted in a $1.2 million dispute that tied up escrow for nine months. Since then, we mandate a detailed working capital model with input definitions agreed upon pre-close.

The most expensive contract mistakes I have seen were not from bad intentions but from mismatched expectations. That is why we now hold a contract alignment session before signing, where legal, finance, and business leaders review key terms together. It reduces surprises, clarifies recourse, and speeds integration.

Ultimately, M&A contracts are not about protection. They are about clarity. They force both parties to define what is being bought, what risks remain, and how surprises will be handled. When the deal goes well, the contract fades into the background. When it goes wrong, it becomes your only friend.

My advice to any executive participating in M&A is simple: respect the paper. Read the definitions. Review the schedules. Ask the uncomfortable questions. Because when the deal closes and the unknown becomes known, it is not memory or intention that protects you. It is the document you signed.

Disclaimer: This article is for informational purposes only and does not constitute legal, tax, or financial advice. Always consult qualified advisors before making decisions on M&A contracts or risk allocation.