We received an LOI where the buyer proposes a general representations and warranties survival period of twenty-four months with a ten percent cap, but our M&A counsel wants twelve months and five percent. How does this term affect our risk profile, and what is standard in lower middle market transactions?

Question

Tyler Smith · Accepted Answer

Survival periods and indemnification caps directly dictate how much of your purchase price remains at risk after closing. General representations cover day-to-day operations, employment practices, commercial contracts, and standard financial statements.

In the lower middle market, a twelve-month to eighteen-month survival period for general representations is standard. Twelve months is optimal because it carries the business through one full financial audit and tax cycle under the buyer's control. A twenty-four-month survival window unnecessarily keeps your balance sheet exposed to operational decisions made by the new owners, who might blame standard client turnover or warranty claims on pre-closing practices.

The indemnification cap determines the maximum dollar exposure you face for general rep breaches. A ten percent cap is typical when there is no Reps and Warranties Insurance policy in place. If the buyer is using an escrow account, negotiate hard to make the escrow fund the sole and exclusive remedy for general indemnity claims. That means once the twelve-month window expires and the escrow money is released, your remaining cash proceeds are locked in without exposure.

Reserve longer survival windows solely for fundamental representations such as legal ownership of the entity, capitalization, and tax authority compliance. If the buyer demands extended survival on standard reps, use your Weekly Level 10 Meeting™ and quarterly Rocks to clean up historical compliance records, vendor master agreements, and employee files ahead of diligence. Documented operational rigor makes it far easier to reject aggressive indemnity timelines.