The buyer is demanding uncapped indemnity for fundamental representations in the purchase agreement, which could put our entire post-close net proceeds at risk. How do we use Representation and Warranty Insurance to shift this liability and secure our walk-away cash?

Question

Tyler Smith · Accepted Answer

Buyers routinely demand uncapped liability or caps up to one hundred percent of the purchase price for fundamental representations, which cover ownership, taxes, and authorization. This creates a massive post-closing risk for owners who want a clean exit. If a tax issue or capitalization dispute arises years down the road, your hard-earned cash could be clawed back entirely. The most effective way to eliminate this risk and protect your proceeds is by introducing Representation and Warranty Insurance, known as RWI, into the deal structure early. RWI shifts the risk of breaches from the seller to an insurance carrier. In a typical RWI-backed deal, the seller’s overall indemnity cap can be reduced to less than one percent of the transaction value, and often to zero, with the policy covering any losses beyond that nominal basket. To make this work, you must prepare your records to ensure the underwriter can easily conduct their diligence. Having a clean EOS® Accountability Chart, documented standard operating procedures, and a clear tax history will make your company highly insurable. Propose that the cost of the RWI premium be split between you and the buyer, or even paid entirely by the buyer as a condition of their bid. This allows you to walk away from the closing table with absolute peace of mind.