How to Avoid Post-Close Surprises When Buying a Small Business

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👋 Hey fellow searchers,

If you’re buying a small business, there’s a part of the purchase agreement you don’t want to gloss over—representations, warranties, and indemnification. They may sound like legal boilerplate, but they’re central to protecting you after the deal closes.

Let’s break them down (with examples) so you know what to look for.

🔍 What Are Representations and Warranties?

In a business sale, representations are statements about the current or past condition of the business. Warranties are promises that those facts are true—and will remain true for a defined period.

🧾 Common Examples Include:

• Financials: The seller states that the financial statements are accurate and prepared in accordance with standard accounting practices

• Taxes: All tax returns have been filed, and no audits are pending

• Legal Status: The business is in good standing and not involved in any lawsuits

• Assets: The seller owns all assets being sold and has the authority to transfer them

📌 Why It Matters: If the seller misrepresents something and it turns out to be false after closing, you can file a claim for damages—but only if these reps and warranties are spelled out clearly.

🛡️ Indemnification (and What Limits Apply)

Indemnification clauses define how losses will be handled if something goes wrong post-close—like a breach of reps/warranties, undisclosed liabilities, or a lawsuit that surfaces later.

📉 Example: Let’s say the seller claims all taxes are paid, but six months after closing, the IRS sends a $20K bill for unpaid payroll taxes. With a solid indemnification clause in place, the buyer could be reimbursed for those losses.

But indemnification isn’t limitless. Most deals include a few key limitations:

• Cap: The maximum liability the seller is responsible for post-sale.

  • Example: In a $1M deal with a 20% cap, the seller would only be liable for up to $200K—even if losses exceed that amount.

•  Basket: The minimum threshold of losses before the buyer can make a claim.

  • Deductible Basket: The buyer eats the first chunk of losses; the seller pays anything above it.

    • Example: $30K in losses with a $25K basket = seller covers $5K.

  • Tipping Basket: Once the threshold is met, the seller covers the full amount of losses, not just the excess.

    • Example: $30K in losses = seller pays all $30K.

• Survival Period: The length of time after closing that the reps and warranties remain enforceable.

  • ⏳ Most general reps last 12–24 months, but reps tied to taxes, environmental issues, or legal compliance may extend longer.

These structures help ensure indemnification is used for meaningful issues—not small disputes—and give both buyer and seller clear expectations after the deal closes.

🧠 Why It Matters in SMB Deals

These aren’t just for $20M PE-backed rollups. Even in a $500K asset sale, reps, warranties, and indemnification can make or break a deal post-close.

In many small business transactions:

• Asset purchase agreements still include reps and indemnities

• Buyers rely on seller promises—because full due diligence isn’t always possible

• Issues like misreported revenue, unpaid taxes, or unlicensed software can carry real risk

📌 Bottom line: If a deal goes sideways and these protections aren’t in place, you’ll wish you had them.

Final Thoughts

You don’t need to be a lawyer—but you do need to understand what you’re signing. A well-crafted agreement with clear reps, warranties, and indemnification terms protects your investment and sets expectations for both sides.

Whether you’re buying a laundromat or a manufacturing firm, don’t treat this as fine print. Work with an attorney who knows small business M&A and make sure these protections are structured to match the size—and risk—of your deal.

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DISCLAIMER: This newsletter is for informational purposes only and should not be considered financial or legal advice. It offers analyses of businesses without endorsing any specific financial actions. Readers are advised to do their own research and consult a professional before making investment decisions.