Representations and warranties — "reps and warranties" or "R&W" — are statements of fact you make in the purchase agreement about your business. They're among the most important and most misunderstood parts of any sale. Understanding what you're agreeing to, how you can limit your exposure, and what happens if a rep is breached is critical before you sign anything.
What Representations and Warranties Cover
In a typical plumbing business purchase agreement, seller reps and warranties will cover:
| Category | What You're Representing |
|---|---|
| Financial statements | Your financials are accurate, prepared consistently, and fairly represent the business |
| No undisclosed liabilities | No debts, obligations, or claims exist that you haven't disclosed |
| Taxes | All taxes have been filed and paid; no outstanding tax issues |
| Contracts | All material contracts disclosed; none in breach; all assignable |
| Employees | No labor disputes, wage violations, or undisclosed employment claims |
| Intellectual property | You own the trade name, website, phone numbers; no infringement claims |
| Licenses and permits | All required licenses are current and in good standing |
| Legal proceedings | No pending or threatened litigation beyond what's disclosed |
| Environmental | No known environmental violations or contamination |
| Material changes | No material adverse change in the business since the last financial statements |
Indemnification: What Happens When a Rep Is Breached
If a representation turns out to be false — a buyer discovers after close that your financials had an error, a lawsuit was pending that you didn't disclose, or a license wasn't current — the buyer can seek indemnification from you. This means they can demand that you compensate them for the damages caused by the breach.
Indemnification is typically subject to:
Basket/deductible: Buyer can only claim once damages exceed a threshold (typically 0.5–1% of deal value). Small issues below the basket don't trigger claims.
Cap: Maximum amount seller can owe, typically 10–15% of deal value for general reps (higher or unlimited for fraud, title, and tax reps).
Survival period: How long after close the buyer can bring a claim. General reps typically survive 12–24 months; tax and title reps survive longer (3–7 years).
The Disclosure Schedule: Your Most Important Protection
Every representation is qualified by a disclosure schedule — a document attached to the purchase agreement where you disclose anything that makes a rep not fully accurate. The disclosure schedule is your defense. If you've disclosed something, the buyer generally can't later claim you breached the rep on that item.
The lesson: be thorough with your disclosure schedule. Disclose known issues proactively. Sellers who try to minimize disclosures to look cleaner often end up with post-close indemnification exposure on items they could have disclosed upfront and moved past.
Representations and Warranties Insurance
R&W insurance is now common in lower middle market deals. It's a policy — typically purchased by the buyer but sometimes by the seller — that covers losses if a seller rep turns out to be false. If a buyer holds an R&W insurance policy, they pursue the insurer for indemnification rather than the seller.
For sellers, R&W insurance is extremely valuable: it reduces post-close exposure, allows escrow amounts to be reduced, and provides cleaner exit. The premium is typically 2–4% of policy limits. On a $4M deal with $2M of coverage, that's $40–80K in premium — often worth it.
→ How to Negotiate the Sale of Your Plumbing Business Where R&W terms fit in the broader negotiation → Plumbing Business Due Diligence Checklist What buyers verify before accepting your representationsDISCLAIMER: The information on this page is provided for general informational and educational purposes only. It does not constitute — and should not be construed as — financial advice, investment advice, legal advice, tax advice, or any other form of professional advice. Nothing on this site creates a professional advisory relationship between you and Lightning Path Partners. Business valuations, transaction structures, and market conditions discussed herein are general in nature and may not apply to your specific situation. Always consult a qualified financial advisor, M&A attorney, business broker, or CPA before making any business or financial decisions. Full Terms of Use →
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