When buying or selling a business, the sale documentation must clearly set out who is responsible if something later goes wrong. Two of the most important protections in a business sale are warranties and indemnities.
Both are used in commercial contracts and corporate transactions to help allocate risk between the buyer and seller. However, they work in different ways. Understanding the difference can help both parties protect their position, avoid disputes and negotiate a fair purchase agreement.
In this guide, we explain what warranties and indemnities are, how they differ, and how buyers and sellers can negotiate terms that protect their interests and support a successful transaction.
A warranty is a contractual statement of fact made by the seller about the target company or target business. In a sale and purchase agreement, warranties are used to give the buyer confidence about what they are buying.
For example, the seller may give warranties confirming that:
If a warranty is untrue, the buyer may be able to bring a warranty claim for breach of contract. To make a successful claim, the buyer will usually need to prove the breach of warranty, show the loss suffered and demonstrate the value of that loss.
An indemnity is a promise to reimburse the buyer for specific losses if a specific event occurs. Unlike warranties, indemnities usually focus on a particular concern or known problems identified during the due diligence process.
For example, an indemnity may cover:
An indemnity claim can often be easier for a buyer than a warranty claim because the buyer may not need to prove a breach of warranty in the same way. Instead, the indemnity is a promise that if the agreed event happens, the seller will reimburse the buyer for the relevant specific losses.
The main difference is the level and type of protection offered.
| Warranties | Indemnities |
|---|---|
| Statements of fact about the business or company | A promise to reimburse for specific losses |
| Buyer usually needs to prove breach and loss | Buyer may only need to show the covered event occurred |
| Often used to test information during due diligence | Often used for known or identified risks |
| Usually limited by disclosure | Usually focused on specific issues |
| May lead to damages for breach of contract | May allow more direct compensation |
In simple terms, warranties help the buyer understand the condition and value of the target company. Indemnities provide stronger protection against particular risks.
For a buyer, warranties and indemnities provide protection against unexpected liability after completion. They encourage the seller to disclose information honestly and give the buyer a remedy if important statements later prove untrue.
For a seller, warranties and indemnities must be carefully controlled. Broad or unclear wording can increase the seller’s liability long after the sale has completed. A well-drafted purchase agreement should therefore include clear limits on liability, including financial caps, minimum claim thresholds and time limits.
The disclosure letter is also important. This document allows the seller to disclose exceptions to the warranties. If an issue has been properly disclosed, the buyer may find it harder to bring a warranty claim later.
In mergers and acquisitions, warranties and indemnities commonly relate to:
In a share sale, warranties may be particularly important because the buyer acquires the company with its history, contracts, assets and liabilities. This makes careful due diligence and negotiation essential for identifying risks and ensuring both parties are adequately protected.
A warranty and indemnity policy, often called W&I insurance, is insurance that may cover certain losses arising from a breach of warranty or indemnity in a business sale.
It can be useful where a seller wants a cleaner exit after completion or where the buyer wants additional security if a claim arises later. In some transactions, W&I insurance can help bridge the gap between the buyer’s need for protection and the seller’s desire to limit future liability.
However, the level of cover will vary depending on several factors, including the nature of the transaction, the risks identified, the due diligence carried out and the insurer’s terms. It is also important to check any exclusions, policy limits and notification requirements carefully.
W&I insurance should not be treated as a replacement for careful drafting or specialist legal advice. The sale agreement, warranties, indemnities and disclosure process still need to be properly negotiated to protect your interests.
The right approach will depend on the size and nature of the transaction, the purchase price, the risks identified and the bargaining position of each party.
Key points to consider include:
A seller will usually want to limit liability as far as reasonably possible, while a buyer will want enough protection to reflect the risks they are taking on. The key is finding a balanced position that protects your interests without creating unnecessary barriers to completion.
At Walker Foster, our corporate and commercial solicitors support both buyers and sellers through this negotiation process. We can help you understand which warranties and indemnities are appropriate, where liability should be limited, and where stronger protection may be needed to achieve the best possible outcome for your circumstances.
Warranties and indemnities can have a significant impact on the outcome of a business sale. If they are too broad, a seller may face unnecessary future liability. If they are too limited, a buyer may be left without adequate protection.
At Walker Foster, our corporate team advises buyers and sellers on business sales, share sales and commercial contracts. We can help draft, review and negotiate warranties and indemnities, prepare or respond to a disclosure letter, and ensure the agreement reflects your commercial objectives.
Our advice is clear, practical and focused on protecting your position while helping the transaction move forward efficiently.
Contact Walker Foster today to speak to our experienced corporate and commercial solicitors for straightforward advice on your business sale.
A concern for business owners is how to run their businesses efficiently, with minimal disruptions or disagreements.
It is worth investing time and effort to ensure that your business is presented as attractively as possible before you start to market it to potential purchasers.
If you have made the decision to sell your business, early preparation is recommended.
Understand the key differences, legal implications and which option best suits your business.
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