Warranties and Indemnities in a UK M&A Deal: What They Actually Do

Why these clauses exist

When a founder sells a company, the buyer is not just paying for the business as it looks on paper. They are paying for the business as it has been represented to them during due diligence: the accounts, the contracts, the IP position, the employment arrangements, the tax history. Warranties and indemnities are the legal mechanism that turns those representations into enforceable promises, and that allocates risk if any of them turn out to be false.

Without them, a buyer who discovers after completion that the company had an undisclosed tax liability, a customer contract that was about to be cancelled, or a founder who never actually owned the IP they claimed to, would have very limited legal recourse. Warranties and indemnities exist to close that gap.

What a warranty is

A warranty is a contractual statement of fact about the company, given by the seller (or sellers) at the point of completion. Typical warranty categories in a UK sale and purchase agreement (SPA) include:

• Corporate and ownership warranties, that the shares are validly issued, unencumbered, and the sellers actually have the right to sell them.
• Financial warranties, that the accounts give a true and fair view and there has been no material adverse change since the last accounts date.
• Tax warranties, that all tax returns have been filed correctly and no undisclosed liabilities exist.
• IP and data warranties, that the company owns or properly licenses the IP it uses, and holds customer and employee data lawfully.
• Employment warranties, that there are no undisclosed disputes, and that contracts, share options and consultancy arrangements are as described.
• Material contracts warranties, that key customer and supplier contracts are valid and there is nothing that would let a counterparty walk away because of the change of control.

If a warranty turns out to be untrue, the buyer’s remedy is a claim for breach of contract. Crucially, that means the buyer generally has to prove the breach caused a loss, and quantify that loss, in the same way as any other contract claim. Damages are usually assessed as the diminution in value of what was bought, not simply pound-for-pound reimbursement of the problem.

What an indemnity is

An indemnity is different and stronger. It is a specific promise to reimburse the buyer, pound for pound, if a defined event or liability arises, regardless of whether the buyer has to prove loss in the same way as a breach of contract claim. Indemnities are typically used for known or suspected risks that have been flagged during due diligence rather than general assurances about the business as a whole.

Common examples include an indemnity for a specific ongoing tax dispute, a known litigation claim, an historic employment issue, or a data protection breach that has already been identified but not yet resolved. Because an indemnity is narrower and pays out directly against the specified loss, it is generally considered more valuable to a buyer than a warranty covering the same ground, and sellers will resist giving them where they can.

The disclosure letter: the seller’s shield

Sellers rarely give warranties unconditionally. Alongside the SPA sits a disclosure letter, in which the seller sets out facts, documents and matters that qualify or except the warranties. If something is properly disclosed, the buyer cannot later claim against the warranty for that specific issue, because they were told about it before signing. This is why due diligence and disclosure are so closely linked: a well-run data room and a thorough disclosure process protect the seller from claims, while gaps in disclosure protect the buyer’s ability to claim later.

Caps, baskets and time limits

Warranty and indemnity protection is rarely unlimited. Negotiated deal terms usually include:

• A liability cap, often linked to a proportion of the deal consideration, above which the seller cannot be pursued.
• A de minimis and basket (or threshold), meaning small individual claims are excluded and claims only count once an aggregate figure is reached.
• Time limits, after which no claim can be brought, commonly a shorter period for general warranties and a much longer period for tax warranties, reflecting how long tax authorities can reopen historic assessments.

Founders selling a company should expect a portion of the proceeds to be held back in escrow, or subject to deferred consideration, specifically to cover potential warranty claims during this window.

Warranty and indemnity insurance

On larger UK deals, and increasingly on mid-market ones, buyers and sellers use warranty and indemnity (W&I) insurance to bridge the gap. The insurer effectively steps into the seller’s shoes for warranty claims up to the policy limit, which lets sellers exit cleanly with less money held back, and gives buyers a solvent party to claim against even if the sellers have since spent or distributed the proceeds. It adds cost and underwriting time, so it tends to appear on deals large enough to justify the premium.

What founders should take from this

For a founder heading toward an exit, the warranties and indemnities negotiation is often where real money is won or lost, arguably more than the headline price. A founder who discloses thoroughly, keeps clean records on IP, tax and employment matters, and takes proper legal advice on caps and time limits will generally end up with a materially better outcome than one who leaves it to the final week of the deal.

Where to check current practice

Warranty and indemnity structures are shaped by ordinary contract law and standard market practice rather than a single regulator, so there is no official rate or threshold to check. For up-to-date guidance and standard-form thinking, the following are reliable starting points.