Anchored to the money held back
Reps, warranties, escrow and insurance
The purchase agreement asks the seller to make a long list of statements about the business, and holds back part of the price against them being wrong. This is the part of the document sellers read last and should read first.
Last reviewed 4 September 2026
Anchored to
What a seller is still promising after closing
What they are
Representations and warranties are statements of fact about the business, made by the seller as at signing and usually repeated at closing. The accounts are accurate. Taxes have been filed and paid. There is no litigation the buyer has not been told about. The company owns what it says it owns. Employment matters are in order. Material contracts are in force and not in breach.
If one of them turns out to be untrue, the buyer has a claim for the loss. In substance this is the mechanism by which risk about the period before closing stays with the seller even though the business has changed hands.
Disclosure is the defence
The single most useful thing a seller can understand: a warranty is not breached by a problem that was disclosed. The disclosure schedule, the document listing the exceptions, is the seller's protection, and time spent on it is the best-value legal work in the transaction.
Sellers under-disclose for two bad reasons. They think mentioning a problem invites a price reduction, and they are tired by the time the schedules are drafted. Both are expensive. A disclosed issue is a negotiation before closing. An undisclosed one is a claim afterwards, when the seller has no leverage and the buyer has the company records.
Caps, baskets and survival
Three numbers bound the seller's exposure and all three are negotiable.
The cap is the maximum the seller can be required to pay. It is normally a proportion of the price rather than all of it, and a narrow set of fundamental matters, typically title and tax, often sits outside the general cap at a higher limit.
The basket is the threshold below which claims cannot be brought, so the seller is not pursued for trivia. It matters whether it is a true deductible, where only the excess is recoverable, or a tipping basket, where crossing the threshold makes the whole amount claimable. The difference is real money and it is one line of drafting.
Survival is how long the warranties last. General business warranties run for a defined period after closing; tax and title usually run longer. A seller who understands the clock knows when their exposure ends, and that date is worth having in mind before agreeing everything else.
The escrow
Rather than rely on a promise to pay claims later, buyers usually hold part of the price with a third party for the survival period. It is released if no claim is made.
For the seller this is straightforward: it is money they have earned and cannot use. What is negotiable is how much, for how long, whether it releases in stages as risks expire, who earns the interest, and whether the escrow is the buyer's only recourse. That last point is the important one. An escrow that is the sole remedy converts the seller's exposure into a known, bounded number. An escrow that is merely the first place a buyer looks leaves the seller exposed up to the cap.
When insurance replaces the holdback
Representations and warranties insurance lets an insurer take on the risk instead. The buyer claims against the policy rather than the seller, escrow shrinks or disappears, and the seller walks away with more cash and a much cleaner break.
It is not free and not always available. There is a premium, a retention that someone must bear before the policy responds, and an underwriting process that adds time and requires diligence thorough enough for an insurer to rely on. Insurers exclude known issues, so anything found in diligence stays with the parties to resolve.
Whether it is worth considering depends mostly on deal size, because the fixed costs do not scale down well. At the size the SBA programme reaches, it is usually not on the table. Higher up the lower middle market it frequently is, and a seller who does not raise it may simply not be offered it.
What matters in practice
Most warranty claims are never litigated. What actually determines a seller's outcome is the quality of the disclosure schedule, the size and duration of the escrow, and whether it is the sole remedy. Those three are settled in the fortnight most sellers spend thinking about something else.
Not advice. This page is general information about how transactions in this market are commonly structured. It is not legal, tax, accounting or investment advice, it does not predict what any business will sell for, and it does not recommend any structure for any particular situation. No client of FIH is described or alluded to anywhere on this site.
More: Why deals die, How the note sets the price, Quality of earnings, The working capital peg, Earnouts, Seller notes and standby paper. See also Methodology and sources.
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FIH advises owners of privately held companies through sale processes: preparing the business, running a competitive approach, and negotiating the terms described above. An initial conversation is confidential, costs nothing and commits you to nothing.