15 Sep The Truth About Indemnity, Reps & Warranties
And Why You Might Still Be on the Hook Years After You Sell
You’ve done it. You’ve built a business, found a buyer, signed the deal, and cashed the check.
Pop the champagne, right? Not so fast.
Because what most business owners don’t realize, until it’s far too late, is that . . .
you may still be legally and financially on the hook years after the sale closes.
Yes, even after the wire hits your account. Even after the new owners move in. Even after you’ve retired, moved to the beach, and thrown your phone in the ocean.
Why?
Because of three little words buried deep in your purchase agreement:
Indemnification, Representations, and Warranties.
And they’re not just legal jargon. They’re landmines. And buyers are experts at using them.
“Wait… I Thought I Was Done?”
That’s what nearly every seller says when they get hit with a post-closing demand from the buyer’s legal team:
- “You misrepresented your financials.”
- “Your customer contract had an automatic termination clause.”
- “There’s a tax liability we didn’t account for.”
- “You didn’t disclose that lawsuit from two years ago.”
Suddenly, you’re in a battle over hundreds of thousands, sometimes millions, of dollars. And you’re playing defense with your retirement on the line.The worst part? It’s all perfectly legal if you signed the wrong agreement.
What Are Reps, Warranties, and Indemnity and Why Do They Matter?
Let’s break this down in plain English.
Representations and Warranties (“Reps & Warranties”)
These are the promises you make to the buyer about your business.
You’re “representing” that your books are accurate, your contracts are valid, your employees aren’t secretly suing you, your IP is yours, and your taxes are paid.
They sound reasonable. But here’s the kicker:
Buyers often demand broad, absolute, and retrospective promises that you simply can’t guarantee. Then they leave the language intentionally vague. So if anything goes wrong, they can come after you for “breach.”
Indemnification
This is the real trap.
Indemnification means you agree to reimburse the buyer if any of your reps and warranties turn out to be false . . . or even incomplete.
In other words: “If you missed something, you’ll pay for it later.”
Some deals even include unlimited personal liability or multi-year survival periods (commonly 1–3 years, but some buyers push for longer). If you didn’t cap your indemnity, you’re exposed long after you thought you were “done.”
The Buyer’s Playbook: How They Weaponize These Terms
Sophisticated buyers, especially private equity firms and serial acquirers, use reps, warranties, and indemnity to:
- Negotiate a Lower Price AFTER the Deal Is Signed
If they discover a “problem” post-close, they simply send a demand letter and ask for money back. You either fight and spend a fortune on legal fees or you settle to make it go away.
- Claw Back Your Earn-Out or Escrow
If your deal includes a holdback or contingent payments, they’ll use indemnity claims to offset those amounts.
- Intimidate You Into Silence
Just knowing they could trigger indemnity makes you much less likely to push back, even when they violate your post-close terms.
Real Example: $1.8M Vanished Overnight
A seller we advised after the fact (he didn’t work with us before the deal and chose to go the “less expensive” route with a generalist lawyer: big mistake) agreed to a 3-year indemnity period and 24 broad reps and warranties.
18 months after closing, the buyer claimed a breach: a legacy employee dispute the seller thought was resolved.
The buyer’s legal team pointed to vague language in the agreement and withheld the final $1.8M of the seller’s earn-out. Fighting it would have cost more than he stood to recover.
He walked away with nothing . . . and learned an expensive lesson:
The real deal isn’t done when you close. It’s done when the indemnity window closes.
How to Protect Yourself (And Your Retirement)
Narrow the Reps & Warranties
Push back on overly broad or blanket statements. Be specific. The more vague your reps, the more exposed you are.
- Cap Your Indemnity Liability
Set a hard dollar cap and fight for it. Don’t allow “unlimited” personal liability under any circumstance.
- Limit the Survival Period
Negotiate the shortest reasonable time window. Don’t let them leave that door open indefinitely.
- Use Escrow Strategically
Insist that any indemnity payments come from a capped escrow fund, not your personal assets or retirement nest egg.
Get Expert Legal Counsel Early
Most business owners think they only need a lawyer for final docs. By then, it’s often too late. The worst traps are laid early. Usually at the LOI stage and even before.
You Built This Business. Don’t Let It Haunt You After You Sell.
When you’re negotiating the sale of your company, the temptation is to focus on the headline price. But that number is meaningless if a buyer can claw it back later.
What you sign today could put your future, and your family’s future, at risk for years to come.
Don’t trust boilerplate language. Don’t rely on what the buyer says.
And don’t assume your CPA or general counsel has seen this before.
Because when it comes to reps, warranties, and indemnities, you don’t get a do-over.
Apply to Work With Us
At Garza Business & Estate Law, we work with a select group of business owners each year. Companies valued between $3 million and $50 million, who are serious about selling smart.
We don’t just check boxes. We fight for sellers. We dig into the fine print. We eliminate risk before it ruins your retirement.
Apply here: https://lgarzalaw.com/schedule-online/
Because the real cost of selling your business isn’t what you see in the purchase agreement. It’s what’s buried beneath it, waiting to blow up when you least expect it.
Let’s make sure that never happens to you.