Warranties & Indemnities: What Sellers Need to Know

• Warranties are factual promises you make about your business in the sale and purchase agreement (SPA). If one turns out to be untrue, the buyer can claim damages.
• Indemnities are pound-for-pound commitments to cover a specific, known risk – even if it only surfaces years after the deal closes.
• Both can be negotiated and capped. A good M&A lawyer – and sometimes warranty and indemnity (W&I) insurance – can significantly reduce your exposure.

What are warranties and indemnities in a business sale?

When you sell your business, the buyer doesn't just take your word for it. Warranties and indemnities are the legal mechanisms that allocate risk between you and the buyer once the deal is done. Warranties are statements of fact about your business you commit to contractually; indemnities are promises to compensate the buyer for specific, identifiable risks. Both sit within the sale and purchase agreement and both can have real financial consequences – so understanding the difference matters.

What is a warranty in a business sale?

A warranty is a contractual statement that something about your business is true. Think of it as an organised, legally binding version of everything you told the buyer during due diligence: that your accounts are accurate, your contracts are in order, your employees are properly engaged, you're not involved in any disputes, and so on.

Warranties serve two purposes. First, they encourage disclosure – the process of surfacing issues during negotiation so the buyer knows exactly what they're buying. Second, they give the buyer a remedy if something you said turns out to be wrong.

How the disclosure process works

Once draft warranties land from the buyer's solicitors, you and your legal team work through them carefully, disclosing anything that isn't strictly accurate. These disclosures go into a disclosure letter, which sits alongside the SPA. If you disclose an issue upfront, the buyer generally can't later claim against that warranty for that specific matter – though it may open a separate conversation about price or require an indemnity in return.

What happens if a warranty is breached?

If a warranty is later found to be untrue and the buyer has suffered a loss as a result, they can bring a claim. But to succeed, they must show three things: the warranty was false, it wasn't properly disclosed, and they suffered a financial loss as a consequence.

Practical limits on warranty claims

Most SPAs include several built-in protections for sellers:

Example: Employment warranties in a technology sale

Imagine you're selling a SaaS business that has relied on a team of freelance developers for several years. During due diligence, you warrant that all your contractors have been correctly classified as self-employed. After the deal closes, HMRC opens an IR35 review and concludes that several of those contractors should have been treated as employees – triggering an unexpected tax liability for the business.

If the warranty was untrue at the time you signed, and you didn't disclose the potential risk, the buyer has grounds to claim. If the SPA has a well-negotiated liability cap of, say, 20% of the purchase price, that puts an upper limit on your exposure. Without a cap, you could be facing a claim for the full diminution in value.

The lesson: be honest and thorough in your disclosures. A good M&A advisor and corporate lawyer will help you identify the grey areas before they become expensive ones.

What is an indemnity in a business sale?

An indemnity is a direct, pound-for-pound promise to reimburse the buyer if a specific event occurs – or a specific liability crystallises – after the deal completes.

The key difference from a warranty is that an indemnity doesn't require the buyer to prove loss. If the triggering event happens, the buyer is entitled to be made whole, regardless of whether the business has suffered in value. Indemnities are also typically uncapped, which makes them significantly more powerful – and more worrying – for sellers.

Indemnities tend to cover risks that are already known at the time of signing but haven't yet crystallised. They might arise from something disclosed in due diligence, something HMRC might still be looking at, or something that sits in a legal grey area.

Example: A workplace incident on completion day

Imagine you're selling a facilities management business. On the very day you exchange contracts, a member of staff is involved in an accident on site. At that point, neither you nor the buyer knows whether a compensation claim will follow – or how large it might be.

An indemnity in the SPA transfers that risk back to you as the seller, even if the claim doesn't land until two years after completion. You may have been completely unaware of the incident when you signed; that doesn't change your liability under a blanket indemnity. The buyer is protected; you carry the tail risk.

This is why it's so important to negotiate indemnities carefully – capping them where possible and agreeing a defined time window within which claims can be made.

Limiting your exposure: what good negotiation looks like

The warranties and indemnities section is typically the most contested part of any SPA. Buyers want broad coverage; sellers want narrow, time-limited, capped commitments. Here is where your legal and advisory team earns their fee.

The main tools available to you as a seller:

• Negotiate the cap – push for an overall liability ceiling, ideally expressed as a percentage of the purchase price (30–100% is common, depending on deal size and risk profile)
• Push for a time limit – 18–24 months for commercial warranties is standard; resist indefinite exposure on indemnities
• Use the disclosure process properly – proactive, accurate disclosures reduce the scope for claims significantly
• Consider W&I insurance – increasingly mainstream in UK M&A, this transfers the risk from you to an insurer (see below)

Example: Bridging the gap with W&I insurance

Consider a professional services firm being sold to a larger group. The buyer's lawyers push for extensive warranties around client contract terms and key employee arrangements. The seller – a founding team who want a clean break – is uncomfortable with wide-open exposure running for years after they've exited.

W&I insurance provides the solution. The buyer purchases a policy that covers them if a warranty proves to be untrue. The seller's liability under the SPA is capped at a nominal amount or a retention held in escrow. The insurer steps in for anything above that threshold. Both sides get what they want: the buyer has protection, and the seller can move on with certainty.

Premiums for W&I insurance typically run between 1–1.8% of the policy limit in the UK market, with the cost borne by whichever party negotiates it into the deal. For most founders, it's a small price to pay for genuine peace of mind.

A word on the disclosure letter

The disclosure letter is your primary tool for limiting warranty exposure. Every issue you disclose upfront – clearly and specifically – reduces the scope for a claim on that warranty. Vague or general disclosures won't protect you; specific ones will.

Work through the warranty schedule with your solicitor line by line. Think carefully about anything that might not be strictly accurate. The effort you put in here will pay dividends if a dispute arises later.

Getting this right

Most founders underestimate how much riding on the warranties and indemnities section of a deal. The headline price gets the attention; the SPA terms determine how much of it you actually keep.

A specialist corporate lawyer with M&A experience is non-negotiable. Their upfront cost – while not insignificant – is a fraction of what a poorly negotiated indemnity could cost you further down the road.

At CapEQ, we work with our clients from the start to make sure the legal and commercial terms are aligned with your goals. We help you understand what you're agreeing to – and what you're not.

About the author

James Pugh is a Partner at CapEQ, the Certified B Corporation mid-market M&A advisory. He has led transactions across technology, healthcare, manufacturing, and professional services over a 15-year M&A career. Read his full bio or book a confidential chat.

.This article is part of our Business Sale Process Unpacked series. Helpful further reads:

• When Should I Sell My Business?
• The Business Sale Process – Your Ultimate Guide
• 10 Questions to Ask When Hiring an M&A Advisor