We are highly concerned about the representations and warranties in the purchase agreement. How do we prepare our operational files to minimize our post-close indemnity liability?

Question

Tyler Smith · Accepted Answer

Representations and warranties are statements of fact about your business that you swear are true at closing. If a buyer discovers a discrepancy post-close, they can claw back a portion of the purchase price from your escrow account. To protect your proceeds, you must run a proactive operational audit on your own files.

Start by auditing your customer and vendor contracts. Ensure every active contract is signed, up to date, and stored in a centralized, secure digital repository. Check for change of control clauses that require customer consent upon a sale, and flag these for resolution.

Next, review your employment records. Ensure you have clear, signed agreements for every employee and independent contractor, explicitly stating that all intellectual property created during their tenure belongs to the company. Address any past regulatory compliance issues or unresolved legal disputes immediately.

Use your leadership team's weekly Level 10 Meeting to identify and resolve any operational liabilities using the IDS process. By proactively cleaning up your legal and operational files, you can purchase representation and warranty insurance with lower premiums, shifting the indemnity risk from your personal balance sheet to an insurance provider.