Representations, Warranties, and Indemnification in Acquisition Agreements: Where the Money Actually Moves

Document type: Article Practice area: Business and Corporate — Mergers and Acquisitions Jurisdiction: United States (Delaware emphasis) Last reviewed: 5 September 2026

Ask a founder what she sold her company for and she will tell you the headline number. Ask her lawyer and you will get a longer answer, because the headline number is gross and the indemnity package is the discount.

A $90 million deal with a 10 percent escrow, an eighteen-month survival period, a 0.5 percent basket, and a 15 percent cap on fundamental representations is a different transaction from a $90 million deal with a 1 percent escrow, a twelve-month survival period, and a buyer-side insurance policy. Both say "$90 million" on the first page. The seller's expected proceeds differ by several million dollars.

Understanding this is the difference between negotiating a deal and negotiating a price. And the terms are not independent — they form a system, and moving one changes the value of the others in ways that are not always obvious to the people arguing about them at two in the morning.

What a representation actually does

A representation is a statement of fact about the target, made as of a date, on which the buyer is entitled to rely.

It does four things simultaneously, and confusion about which one is at issue causes most of the drafting disputes in this area:

One — it allocates risk. If the target has an undisclosed environmental liability, the representation about environmental compliance determines who pays for it.

Two — it forces disclosure. The seller cannot make the representation without checking, and the checking is where problems surface. Half the value of a comprehensive representation set is that it makes the seller do diligence on itself.

Three — it creates a closing condition. The bring-down condition requires the representations to be true at closing, which gives the buyer a walk right if something changes.

Four — it creates an indemnity claim. If the representation was false, the buyer has a contractual claim, subject to everything in the indemnification article.

The four functions come apart in negotiation. A seller who agrees to a broad representation but limits survival to twelve months has accepted the disclosure function and largely eliminated the indemnity function. A seller who qualifies a representation by knowledge has weakened all four. Knowing which function you are trading is how you avoid giving away something you meant to keep.

The anatomy of the representation set

Fundamental representations

Organization and good standing, authority to enter the agreement, capitalization, title to the shares or assets, and — depending on the deal — taxes and the absence of brokers.

Why they are treated differently. These go to whether the buyer is getting what it thinks it is buying. A failure of the capitalization representation means the buyer did not acquire what it paid for. Accordingly, fundamental representations typically survive longer — often the statute of limitations — and are subject to a higher cap, frequently the full purchase price, with no basket.

The negotiation is about the list. Buyers want taxes, employee benefits, environmental, and intellectual property treated as fundamental. Sellers want the list confined to organization, authority, capitalization, and title. The middle ground usually creates a "specified representations" tier with intermediate survival and caps.

Operational representations

Financial statements, absence of undisclosed liabilities, absence of certain changes, material contracts, litigation, compliance with law, permits, real property, personal property, intellectual property, employees and benefits, environmental, taxes, insurance, customers and suppliers, related-party transactions, and — increasingly — data privacy, cybersecurity, and export controls.

These carry the ordinary survival period and the ordinary cap.

The catch-all

A representation that the information provided is accurate and does not omit anything necessary to make it not misleading — sometimes called a 10b-5 representation. Sellers resist it strongly, because it converts every diligence document into a potential indemnity claim, and because a seller cannot practically verify it. Its presence or absence is a meaningful economic term.

Qualifiers: where the negotiation actually happens

Three qualifiers do most of the work, and they compound.

Materiality. "The Company is in compliance in all material respects with applicable law." What counts as material is undefined, and disputes about it are common. A defined materiality threshold — expressed in dollars — is clearer and increasingly used.

Knowledge. "To the Company's Knowledge, there is no threatened litigation." The definition matters enormously:

Actual knowledge of specified individuals is the narrowest.
Actual knowledge after reasonable inquiry requires the individuals to have asked.
Constructive knowledge — what they should have known — is the broadest and sellers resist it.
The list of individuals is itself a negotiation. A definition naming three executives is very different from one naming fifteen managers.

Dollar and time thresholds. "All contracts requiring payments in excess of $250,000 in any year" or "all litigation commenced within the past three years." These are scoping devices for the disclosure schedules as much as risk allocations.

Compounding is the trap. A representation qualified by materiality, by knowledge of three people, and by a $500,000 threshold is close to unbreachable. Read the qualifiers together and ask what would actually have to happen for the representation to be false.

The materiality scrape

A negotiated fix for a real problem.

The problem. Materiality qualifiers exist so a seller is not in breach over trivia. But if they also apply when calculating damages, the buyer is uncompensated for the very losses the qualifiers were meant to exclude from the breach analysis — and because a basket already screens out small claims, the qualifiers are doing the work twice.

The scrape. A provision that materiality and material adverse effect qualifiers are disregarded for purposes of determining (a) whether a breach occurred, (b) the amount of losses, or (c) both.

Three variants:

Damages-only scrape. Qualifiers apply to whether there was a breach; once breach is established, damages are computed without them. The most common compromise.
Double scrape. Qualifiers disregarded for both breach and damages. Buyer-favorable.
No scrape. Seller-favorable.

Why it matters more than sellers expect. With a damages-only scrape and a $500,000 basket, a seller who represents material compliance and has forty small violations totaling $2 million pays $1.5 million. Without the scrape, the seller may pay nothing, because no individual violation was material.

A carve-out convention: the scrape usually excludes representations where materiality is definitional rather than qualifying — the "material contracts" representation, for example, where removing "material" would require listing every contract the company has.

Disclosure schedules

The schedules are the other half of the representations, and they are drafted under time pressure by people who are also closing a deal.

What they do. Each schedule qualifies a specific representation by listing the exceptions. A representation that there is no litigation, qualified by a schedule listing four lawsuits, means there are four lawsuits and no others.

The general disclosure provision is the most contested paragraph in the schedules. It typically provides that disclosure in one section qualifies other sections where the relevance is "reasonably apparent." Buyers want relevance to be apparent on its face; sellers want cross-qualification to be general. This single sentence determines whether a buried disclosure in the contracts schedule qualifies the litigation representation.

Practical rules that prevent post-closing fights:

Cross-reference explicitly. If a fact qualifies four representations, list it under all four. It costs nothing and eliminates the argument.
Disclose the fact, not the document. "See Exhibit 4.12(a)" is not disclosure; a description of what the exhibit shows is.
Do not over-disclose to be safe. A schedule listing everything obscures the material items and, in some deals, has been argued to be no disclosure at all.
Update before signing and again before closing where the agreement permits, and understand whether an update cures a breach or merely informs the buyer. This is the most consequential drafting question in the schedules: a right to update that cures breaches transfers interim risk to the buyer entirely.
Version control. Schedules go through many drafts, and knowing which version was attached at signing has been the subject of litigation.

The indemnity architecture

Six terms, and they price each other.

Survival

How long after closing the representations remain actionable.

Operational representations: twelve to twenty-four months, with eighteen the most common. The theory is one full audit cycle plus a margin.
Fundamental representations: the statute of limitations, or a long fixed period such as six years.
Tax representations: the applicable statute of limitations plus sixty days.
Fraud: never limited. See below.

A drafting point that matters. Survival provisions are contractual limitations periods, and Delaware enforces them. But whether a claim "survives" depends on whether notice was given before expiry or whether suit was filed. Specify. A provision requiring only notice, with a further period to sue, is seller-unfriendly but clear; one requiring suit within the survival period is a genuine trap for a buyer who is negotiating in good faith on the last day.

The basket

A threshold below which no claim is payable.

Deductible basket (also "true deductible"): the seller pays only losses above the threshold. Seller-favorable.
Tipping basket (also "first-dollar"): once losses exceed the threshold, the seller pays from the first dollar. Buyer-favorable.
Hybrid: a deductible with a tipping point at a higher number.

Customary size: 0.5 to 1.0 percent of purchase price for a deductible basket, sometimes lower in larger deals.

The de minimis. A separate, smaller threshold below which an individual claim does not count toward the basket at all. Typically 0.05 to 0.1 percent of purchase price. Without it, a buyer can aggregate hundreds of trivial claims to reach the basket.

The cap

The maximum indemnifiable amount.

Operational representations: 10 to 15 percent of purchase price in a traditional deal; 0.5 to 1 percent where representation and warranty insurance carries the risk.
Specified representations: a middle tier, often 25 to 50 percent.
Fundamental representations: the purchase price, sometimes with a carve-out that no seller pays more than it received.
Fraud: uncapped.

The escrow or holdback

Cash withheld at closing to fund claims.

Traditional: 5 to 15 percent of purchase price, held twelve to twenty-four months.
Insured deals: 0.5 to 1 percent, held twelve months, to fund the policy retention.
Release mechanics: a single release at the end, or a partial release at an interim date with the remainder held for pending claims.
Exclusive recourse to escrow is a seller ask and a significant one: it converts the escrow into the seller's total exposure, which is not the same as a cap, because a cap with recourse beyond the escrow lets the buyer pursue the sellers personally.

Exclusive remedy

A provision making indemnification the sole and exclusive remedy for breaches, excluding common law claims.

Sellers want it and buyers accept it, with carve-outs for fraud, for specific performance and injunctive relief, and for the purchase price adjustment.

The fraud carve-out

The most heavily negotiated sentence in the article, and the one most often drafted badly.

The problem it solves. Delaware will not enforce a contractual provision that immunizes a party from liability for its own intentional misrepresentation. ABRY Partners V, L.P. v. F & W Acquisition LLC, 891 A.2d 1032 (Del. Ch. 2006) held that a seller may cap its exposure for a contractual representation it did not know was false, but may not, consistent with public policy, insulate itself from a claim that it knowingly made a false representation in the agreement. The court also held that an anti-reliance provision can bar a claim based on extra-contractual statements, which is a distinct and enforceable protection.

What that means in drafting:

Define "Fraud." An undefined fraud carve-out invites a plaintiff to plead constructive fraud, equitable fraud, or negligent misrepresentation and thereby escape every limitation. A common definition: actual, knowing, and intentional misrepresentation of a representation contained in the agreement, made with intent to induce reliance, on which the other party relied to its detriment — expressly excluding constructive fraud, negligent misrepresentation, and equitable fraud.
Include a robust anti-reliance provision. Something like: the buyer acknowledges that neither the seller nor any other person has made any representation except those expressly set out in Article [__], and the buyer has not relied on any other statement, and disclaims reliance on any projection, estimate, or forecast. ABRY confirms these are enforceable as to extra-contractual statements.
Do not attempt to disclaim intentional misrepresentation of a contractual representation. It will not be enforced, and the attempt colors the rest of the agreement.

Sandbagging

The question: may a buyer who knew before closing that a representation was false nonetheless bring an indemnity claim on it?

Pro-sandbagging clause:

The right of any party to indemnification shall not be affected by any investigation conducted, or any knowledge acquired at any time, whether before or after the execution and delivery of this Agreement, with respect to the accuracy of any representation or warranty.

Anti-sandbagging clause:

No party shall be entitled to indemnification for any breach of which such party had actual knowledge prior to the Closing.

Silence. Most agreements are silent, which is a choice with consequences that vary by governing law. Delaware's approach treats the representations as bargained-for contractual allocations and has generally been read as permitting recovery notwithstanding buyer knowledge, on the theory that the buyer paid for the representation. Eagle Industries, Inc. v. DeVilbiss Health Care, Inc., 702 A.2d 1228 (Del. 1997) reflects the broader Delaware disposition to enforce the written contract as the parties made it. New York's case law is more mixed and has, in some formulations, required a showing that the buyer relied. The practical instruction: do not leave it to the governing law. Say what you mean.

A negotiating note. Buyers ask for a pro-sandbagging clause and rarely need it. Sellers resist it strenuously and rarely benefit. The more useful conversation is about what happens when diligence surfaces a problem: the parties should price it, put it in a specific indemnity, or exclude it — not leave it for a sandbagging argument later.

Special indemnities

Where diligence finds a specific, identified problem — a pending tax assessment, a known environmental condition, a disputed customer contract, an unresolved employee classification question — the answer is a special indemnity: a dollar-one, uncapped or separately capped, longer-surviving obligation covering that item specifically.

Why this is better than any alternative. It prices the known risk explicitly, keeps it out of the general basket and cap, and eliminates the argument about whether the disclosure schedule covered it.

Drafting points:

Define the covered matter precisely, by reference to the diligence document or the schedule item.
State survival, cap (or its absence), and whether the basket applies (it should not).
Say who controls the defense and settlement of the matter.
Consider a separate escrow tranche.
Address what happens if the matter resolves favorably before the escrow release.

Representation and warranty insurance

RWI changed the shape of middle-market and larger private deals more than any other development of the last fifteen years.

How it works. A buy-side policy (the standard form) insures the buyer against losses from breaches of the seller's representations. Premiums have generally run in the range of 2.5 to 4 percent of the coverage limit, with limits commonly at 10 percent of enterprise value. The retention — the insured's deductible — is typically 0.5 to 1 percent of enterprise value, often dropping to half that after twelve months, and is customarily split between the parties through a small escrow.

What it changes:

Escrows shrink dramatically, often from 10 percent to under 1 percent.
Caps on operational representations fall to the level of the retention.
Survival extends — policies commonly run three years for operational representations and six for fundamental ones, longer than sellers would ever agree contractually.
The seller gets close to a clean exit, which is why sellers pay for it in competitive processes.
The buyer's counterparty becomes an insurer, which is generally more solvent and less emotionally invested than a group of former founders.

What it does not cover. Known issues identified in diligence — which is precisely why special indemnities remain essential. Also commonly excluded: purchase price adjustments, forward-looking statements, pension underfunding, certain tax positions, asbestos and PFAS-type exposures, and sometimes cybersecurity or wage-and-hour matters depending on the industry and the underwriting.

What the underwriting does to the process. The insurer reviews the diligence reports and holds an underwriting call. The quality of the buyer's diligence directly determines coverage — gaps in diligence produce exclusions. This is an underappreciated discipline: RWI makes thorough diligence economically valuable in a way it was not before.

Timing. Start the process four to six weeks before signing. A non-binding indication takes a few days; underwriting takes one to two weeks after the diligence reports are available.

Where it does not fit. Very small deals (under roughly $20 million, where premiums and minimums are disproportionate), deals in industries insurers avoid, and deals where the diligence is too thin to underwrite.

Material adverse effect

The MAE definition is the buyer's walk right, and Delaware courts have made it extraordinarily hard to invoke.

The structure of the definition is a general clause followed by carve-outs followed by carve-outs-from-the-carve-outs:

"Material Adverse Effect" means any change, event, or effect that has had or would reasonably be expected to have a material adverse effect on the business, results of operations, or financial condition of the Company, excluding any effect resulting from (a) general economic conditions, (b) conditions affecting the industry generally, (c) changes in law or accounting principles, (d) acts of war, terrorism, or natural disaster, (e) the announcement of the transaction, (f) any failure to meet projections (though the underlying cause may be considered), and (g) actions taken at the buyer's request — provided that effects under (a) through (d) may be considered to the extent they have a disproportionate effect on the Company relative to others in its industry.

Every clause of that is a negotiated allocation. The carve-outs assign systematic risk to the buyer and company-specific risk to the seller; the disproportionate-effect proviso returns industry risk to the seller when it lands unequally.

The standard for invoking it is severe. In re IBP, Inc. Shareholders Litigation, 789 A.2d 14 (Del. Ch. 2001) framed an MAE as requiring an adverse change of consequence to the company's earnings power "over a commercially reasonable period, which one would think would be measured in years rather than months." Hexion Specialty Chemicals, Inc. v. Huntsman Corp., 965 A.2d 715 (Del. Ch. 2008) reinforced it, holding the buyer had not met its heavy burden despite a substantial earnings shortfall, and noting that a buyer seeking to invoke an MAE "faces a heavy burden."

Delaware's first finding of an MAE came in the Akorn litigation in 2018, where the target's earnings had collapsed by roughly half against a backdrop of serious, undisclosed regulatory data-integrity failures — a fact pattern so severe that its exceptionality is the point.

The practical lesson for buyers: the MAE is not a financing out, a buyer's-remorse out, or a renegotiation lever with any real force. If a buyer needs to be able to walk for a specific risk, it must be a specific closing condition, not an argument about the MAE definition. Buyers who need certainty negotiate quantified conditions — minimum EBITDA, retention of named customers, the absence of a specified regulatory action.

The interim operating covenant is the sleeper. Alongside the MAE, most agreements require the target to conduct its business "in the ordinary course consistent with past practice" between signing and closing. Delaware has treated this as an independent obligation, and a target that makes dramatic operational changes — even sensible ones responding to an emergency — can breach it. Where a target expects to make significant changes, it should negotiate express permission rather than rely on reasonableness.

Purchase price adjustments and earnouts

The working capital adjustment. Most private deals close on estimated financials and true up afterward against a target working capital figure.

Where it goes wrong:

The target is set without a defined methodology. The agreement should specify the accounting principles, and — critically — the hierarchy if they conflict: typically the specific methodologies in an exhibit first, then the company's historical practice, then GAAP. Without a hierarchy, both sides argue their preferred layer.
A sample calculation is not attached. Attach one, computed on real historical data. It is the single most effective way to prevent a dispute.
The dispute mechanism is undefined. Specify an independent accounting firm, acting as an expert and not an arbitrator, deciding only the disputed line items, within a range bounded by the parties' positions, with a fee allocation proportional to how the items are decided.
The adjustment interacts with the indemnity. Say expressly that a matter taken into account in the adjustment cannot also be indemnified, or the buyer recovers twice.

Earnouts. A portion of the price contingent on post-closing performance.

They exist because the parties disagree about value, and they generate litigation because that disagreement does not disappear at closing — it moves to the definition of the metric.

What determines whether an earnout works:

A metric the buyer cannot easily manipulate. Revenue is more objective than EBITDA; EBITDA is more objective than "net contribution."
Explicit operating covenants. Will the buyer maintain the sales force, the product line, the pricing, the brand? Say so, specifically, or the covenant is unenforceable in practice.
The implied covenant is not a substitute. Delaware will imply an obligation of good faith and fair dealing, but it is a gap-filler for terms the parties did not address, not a licence to rewrite a bargain. Sellers who rely on it usually lose.
Information rights. The seller needs the right to see the calculation, the underlying books, and enough detail to check it.
Acceleration on a change of control. If the buyer sells the business during the earnout period, the earnout should accelerate or convert.
A dispute mechanism on the same expert-determination model as the working capital adjustment.

The honest advice to sellers: discount the earnout heavily in your own valuation. Many are never paid, and the ones that are paid are frequently paid after a dispute.

A worked negotiation

Sable Ridge Foods, a family-owned specialty ingredients manufacturer, is being sold by its founders to Thistlewaite Industrial, a strategic buyer. Enterprise value: $118 million. Two founders hold 82 percent; a growth fund holds 18 percent.

Opening positions.

Thistlewaite: 10 percent escrow, twenty-four-month survival, tipping basket at 0.5 percent, cap at 15 percent, fundamental reps at the full purchase price, double materiality scrape, pro-sandbagging, exclusive remedy with a broad fraud carve-out.

Sable Ridge: 3 percent escrow as exclusive recourse, twelve-month survival, deductible basket at 1 percent, cap at 5 percent, no scrape, anti-sandbagging, and a narrow fraud definition.

How it resolved, and why.

RWI changed the frame. Sable Ridge's banker had run a competitive process, and three of the four bidders had assumed insurance. Thistlewaite obtained a $12 million policy — roughly 10 percent of enterprise value — at a 3.1 percent premium, with a 0.75 percent retention. Premium split: buyer pays, as is customary where the seller conceded on the retention escrow.

The resulting package:

Escrow: 0.75 percent ($885,000), released at twelve months less pending claims, funding half the retention. The founders' exposure beyond it: fraud and fundamental representations only.
Survival: eighteen months contractual for operational representations; the policy runs three years, so the buyer's real protection is longer than the contract's.
Basket: deductible at 0.5 percent, with a de minimis of $50,000.
Cap: the escrow for operational representations; purchase price for fundamental representations, several among the sellers pro rata.
Scrape: damages-only, with a carve-out for the material contracts and specified-contracts representations where "material" is definitional.
Sandbagging: silent, because neither side would move — but with two specific indemnities addressing everything diligence had found.
Fraud: defined as actual, knowing, and intentional misrepresentation of a representation in the agreement, with an express exclusion of constructive fraud, equitable fraud, and negligent misrepresentation, coupled with a full anti-reliance provision. This is the ABRY structure — enforceable as to extra-contractual statements, and not attempting the unenforceable.

The two special indemnities. Diligence had surfaced (1) a state sales-and-use tax exposure of roughly $1.4 million arising from a nexus question in two states, and (2) a wage-and-hour classification issue affecting eleven route drivers. Both were excluded from the RWI policy as known matters, which is exactly what insurers do.

Tax: dollar-one, uncapped, surviving to the statute of limitations plus sixty days, with a separate $1.75 million escrow tranche and seller control of any audit defense subject to buyer consent to settle.
Wage and hour: dollar-one, capped at $2 million, surviving three years, buyer-controlled defense with seller consultation.

Earnout. $9 million contingent on the specialty enzymes line reaching $31 million in revenue in the second full year post-closing. Metric: gross revenue of specified SKUs, defined by product code. Covenants: maintain the sales team headcount for the line, continue the existing distributor relationships, no reallocation of the line's SKUs to another business unit, and no pricing changes below a floor without seller consent. Information rights: quarterly reporting with SKU-level detail. Acceleration in full on a sale of the business unit.

What the founders actually got. Headline $118 million; $885,000 in general escrow instead of $11.8 million; $1.75 million in a tax-specific escrow with a realistic prospect of return; $9 million at risk on the earnout. Compared to the traditional structure they had assumed, roughly $10.9 million of proceeds moved from escrow to closing cash — which is what the insurance premium bought, and why sellers in competitive processes push buyers toward RWI.

What Thistlewaite got. Longer effective survival, an insurer as its counterparty for most claims, and two known risks priced explicitly rather than argued about later.

The lesson. The negotiation was not about who "won" the escrow. It was about routing each category of risk to the party or instrument best suited to bear it: systematic risk to the buyer through the MAE carve-outs, unknown breach risk to an insurer, known risks to specific indemnities with their own escrows, and valuation disagreement to an earnout with real covenants.

Making a claim, and defending one

The indemnification article is procedural as well as economic, and the procedure decides claims.

The claim notice. Most agreements require written notice describing the claim "in reasonable detail" and stating the estimated amount, delivered within the survival period. Courts have dismissed claims for notices that failed to identify the representation breached or gave no basis for the amount. Draft the notice as though it will be read by a judge deciding a motion, because it may be. Identify the representation, the facts, the loss, and the calculation, and attach what you have.

Third-party claims. Where the loss arises from a claim by someone outside the deal — a customer, a regulator, a former employee — the agreement typically gives the indemnifying party the right to assume the defense, subject to conditions:

Written acknowledgment that the matter is indemnifiable.
Counsel reasonably acceptable to the indemnified party.
No settlement without consent where the settlement includes non-monetary relief, an admission, or an amount above the cap.
The indemnified party may participate at its own expense.
Carve-outs where the claim seeks injunctive relief, involves a governmental authority, or involves a customer relationship the buyer must protect.

The conflict this creates. A seller controlling the defense of a customer claim has an interest in a cheap settlement; a buyer has an interest in preserving the customer. Address it in the agreement rather than in the moment.

Mitigation. Most agreements require the indemnified party to use commercially reasonable efforts to mitigate. Sellers should insist; buyers should scope it to avoid an argument that the buyer had to restructure its business.

Collateral sources. Recoveries under insurance and from third parties typically reduce indemnifiable losses. Two drafting questions: does the buyer have to pursue insurance first (sellers want yes; buyers resist because of premium and relationship consequences), and are premium increases and deductibles added back (they should be).

Tax benefits. Losses are often reduced by tax benefits actually realized. "Actually realized" is the right formulation; "reasonably expected to be realized" produces disputes about a hypothetical tax position.

No double recovery. State expressly that an item taken into account in the purchase price adjustment cannot also be indemnified, and that a loss recovered under the RWI policy cannot be recovered again from the sellers.

Consequential and punitive damages. Sellers exclude them; buyers carve out amounts actually paid to a third party. The middle ground — excluding damages that are "speculative or punitive" while preserving damages that are reasonably foreseeable — is more workable than the flat exclusion, because a flat exclusion of consequential damages can eliminate the buyer's principal loss in a business acquired for its earnings.

A recurring fight: diminution in value. Buyers argue that a breach reducing earnings should be measured by applying the acquisition multiple to the lost earnings; sellers argue for out-of-pocket loss. Agreements increasingly address this expressly, and it is worth doing — the difference between a $2 million repair cost and a nine-times multiple applied to a $2 million earnings shortfall is the whole claim.

Asset deals: the representation set changes

Everything above assumes a stock or merger transaction. An asset purchase differs in ways that affect the indemnity package.

Assumed and excluded liabilities do the work of indemnification. In an asset deal, the buyer takes only the liabilities it agrees to assume. The schedule of assumed liabilities and the definition of excluded liabilities are, functionally, the indemnity — and they are not subject to caps, baskets, or survival periods.

The seller's indemnity covers excluded liabilities, typically dollar-one and uncapped, because these are liabilities the buyer never agreed to take.

Title representations become more important, because the buyer must confirm it is acquiring each asset free of liens.

Consents matter more. Contracts that require consent to assign, and the ones that terminate on assignment, are a diligence and a closing-condition issue rather than an indemnity one.

Successor liability persists despite the structure in several areas — environmental, certain employment and benefits obligations, product liability under state continuity doctrines, and tax in some states. The asset structure reduces but does not eliminate these, which is why an asset deal still needs a full representation set and an indemnity.

Where deals go wrong after closing

The buyer discovers a problem in month twenty and the survival period was eighteen. Diarize the survival dates at closing, in the buyer's calendar, with a review six weeks before each expires.

The claim notice is inadequate. Draft it properly the first time; amendments after the survival period may not relate back.

The disclosure schedule arguably covered it. Cross-reference every fact under every representation it qualifies.

Nobody can find the signing version of the schedules. Keep a signed, dated set with the closing binder.

The escrow releases while a claim is pending. Confirm the mechanics — a proper claim notice should hold back the claimed amount.

The RWI policy excludes the loss. Read the policy's exclusions against the diligence reports before signing, not after a claim.

The earnout metric turns out to be manipulable. The covenants were general, the buyer reorganized, and the seller's only argument is the implied covenant. Draft specific covenants.

The working capital dispute is larger than the escrow. Set the target from a real calculation on real data, with a sample attached.

Both parties' lawyers left the deal team. Someone at the buyer and someone at the seller should own the post-closing obligations, with a written summary of every deadline and every contingent amount. This costs an hour at closing and prevents most of what appears above.

The one-page summary

The representations are a disclosure engine first and a risk allocation second. Their greatest value is that they make the seller examine its own business before a buyer does.

Read qualifiers together, not separately. Materiality plus knowledge of three people plus a dollar threshold can make a representation unbreachable.

The materiality scrape is a real economic term, not a technicality. Damages-only is the standard compromise.

Disclosure schedules should cross-reference generously and describe facts, not documents. The right to update, and whether an update cures a breach, is the most consequential drafting question in them.

The six indemnity terms price each other. Survival, basket, cap, escrow, exclusive remedy, and the fraud carve-out are a system; moving one changes the value of the others.

Define fraud. An undefined carve-out swallows every limitation. ABRY permits you to cap innocent breaches and to disclaim reliance on extra-contractual statements; it does not permit you to immunize a knowing lie in the agreement.

Say what you mean about sandbagging, and price known problems through special indemnities rather than leaving them to argument.

RWI reshapes the whole package — smaller escrow, lower cap, longer effective survival, cleaner exit — and makes buyer diligence economically valuable, because gaps in diligence become exclusions.

The MAE is not a walk right in practice. IBP and Hexion set a burden buyers almost never meet. If you need to be able to walk, negotiate a specific condition.

Earnouts fail on the metric and the covenants. Choose an objective metric and write specific operating commitments; the implied covenant will not save a vague one.

And the practical test for any indemnity package: if the worst thing diligence found actually happened, who pays, how much, out of what, and by when? If the agreement does not answer that in four sentences, it is not finished.