Reps, warranties & indemnities

Factual definition

Reps, warranties and indemnities are contractual statements and assurances about a business, together with provisions allocating specified losses or liabilities. Representations and warranties need not be sworn under oath; remedies depend on the agreement and applicable law.

The three terms

A representation (rep) is a statement of fact about the business, made as of signing or closing. For example, the seller states that the financial statements are accurate.

A warranty adds a promise that the statement is true. If it turns out to be false, the seller has broken that promise.

An indemnity is the payment obligation. It says who pays for specified losses, how much and under what conditions.

The rep and warranty say what is true. The indemnity says what happens when it is not.

In Shayne’s words

“Diligence turns into contract here. Diligence produces findings.

The purchase agreement converts findings into allocations. Every open diligence item ends the deal process in exactly one of four places (a representation, an indemnity, an escrow draw, or a price adjustment) and anything that lands in none of them is a risk being accepted by silence.

Sellers discover late that signing reps converts unknown problems into personal liability up to the cap. Buyers discover that a rep is only as good as its remedy.”

Reps, warranties & indemnities in round numbers

Hypothetical: a seller represents that no single supplier provided more than 50% of the business’s alloy purchase volume during the stated year. One supplier actually provided 60% on that same basis, and the concentration was not disclosed.

Assume this breaches the representation. Any recovery still depends on the agreed remedy and its conditions.

Two suppliers totaling 80% would not alone establish a breach. They could each supply 40%.

How baskets and caps limit recovery

A basket is the amount of loss the buyer absorbs before the seller pays. A cap is the most the seller will pay.

Hypothetical: a buyer acquires the target for $20M. The purchase agreement sets a deductible basket of 0.5% and a cap of 10%.

• Purchase price: $20M
• Basket: $20M × 0.5% = $100k
• Cap: $20M × 10% = $2M

After closing, the buyer suffers a $1.5M loss from a breached rep.

• Loss: $1.5M
• Less basket: $1.5M − $100k = $1.4M
• Below the cap of $2M, so recovery: $1.4M

The buyer bears the first $100k. The seller pays the rest, up to the cap.

Hypothetical: the same loss under a tipping basket instead. Once losses pass the threshold, the seller pays from the first dollar.

• Loss: $1.5M
• Exceeds the basket of $100k, so recovery: $1.5M

Hypothetical: a larger loss under the original deductible basket.

• Loss: $2.5M
• Less basket: $2.5M − $100k = $2.4M
• Limited by the cap, so recovery: $2M

The buyer absorbs $500k in total: the $100k basket plus $400k above the cap. Whether the cap holds for fraud or certain fundamental reps depends on the agreement.

How Shayne Fitz-Coy uses Reps, warranties & indemnities

“Map every material diligence finding to its destination before signing: does it become a specific rep, a special indemnity, escrow coverage, or a price change? The discipline works in both directions, sellers who expect the mapping can pre-clean the problems it would surface, and buyers who skip it have negotiated price but not risk.

Diligence asks the questions. Reps, warranties, and indemnities decide who pays for the answers.”

Why Shayne Fitz-Coy’s perspective on Reps, warranties & indemnities matters

“This is where “we’ll look into it” becomes “who pays.” The conversation that began as financial analysis ends as contract language, and the quality of the ending is what determines whether the analysis mattered.”