Warranties and indemnities are legal protections used in business sale agreements. Buyers use them to reduce risk. Sellers should understand them before signing because they can create post-completion liability.
Quick Answer: What are warranties and indemnities?
A warranty is a contractual statement made by the seller about the business. For example, the seller may warrant that the company has disclosed all material contracts, that its financial accounts are accurate, or that there are no undisclosed legal disputes. If a warranty turns out to be untrue, the buyer may have a claim against the seller.
An indemnity is a specific promise to compensate the buyer for a defined loss if a particular risk materialises. Where a warranty is a general statement about the state of the business, an indemnity is usually targeted at a known or identified issue — for example, a specific tax liability, a pending employment claim, or an unpaid supplier debt.
Both are serious legal commitments. Warranties are often broad. Indemnities can be more powerful for buyers because they are tied to specific events rather than general breach principles. For sellers, both can create real post-completion liability if not properly negotiated, limited and disclosed against.
Buyers should not treat warranties as a substitute for due diligence. Sellers should not sign them without taking legal advice and working through a careful disclosure process.
Contents
Why warranties and indemnities exist
When a buyer acquires a business, they can never have complete knowledge of everything that has happened in that business, or everything that might come to light after completion. Due diligence helps — it allows the buyer to investigate the finances, contracts, staff, assets and legal position of the business before they commit. But due diligence has limits. Some problems are hidden. Some are not yet apparent. Some only emerge months or years after the sale is done.
Warranties and indemnities exist to allocate the risk of those unknown or uncertain matters between buyer and seller. In broad terms, they give the buyer a mechanism to seek compensation if something turns out to be materially different from what the seller represented — or if a specific risk that was present at the time of sale crystallises into a loss.
The scope of warranties and indemnities in any given transaction reflects the nature and complexity of the business. They may cover the accuracy of financial information, ownership of assets, tax compliance, employee matters, the status of customer and supplier contracts, pending or threatened litigation, intellectual property rights, data protection compliance, insurance arrangements, property and lease obligations, and much more.
In smaller business sales, the warranties and indemnities may be relatively brief. In larger or more complex transactions, this part of the sale agreement can become one of the most heavily negotiated sections. Either way, both parties need to understand what they are agreeing to before the documents are signed.
What is a warranty?
A warranty in a business sale is a statement of fact or assurance given by the seller as part of the sale agreement. The seller is, in effect, confirming to the buyer that certain things about the business are true.
Common examples of warranty statements include:
The seller is the legal owner of the assets or shares being sold
There are no undisclosed legal claims or disputes against the business
The most recent accounts have been prepared on a consistent and proper basis and give a true and fair view
All material customer and supplier contracts have been disclosed
There are no employees beyond those listed in the disclosure documents
The company has filed all required tax returns and there are no outstanding tax liabilities beyond those shown in the accounts
The seller has the legal authority to enter into the sale agreement
If a warranty proves to be untrue — if an undisclosed liability emerges, if a material contract was not disclosed, if the accounts contained errors — the buyer may have a legal claim against the seller. The availability and value of that claim will depend on the terms of the agreement, the nature of the breach, and the loss the buyer has suffered.
The key point for sellers is this: warranties are not boilerplate wording to be signed without scrutiny. Every warranty should be read carefully, checked against the actual position of the business, and either confirmed as accurate or disclosed against where an exception exists.
What is an indemnity?
An indemnity goes further than a warranty in one important respect. Rather than being a general statement that something is true, an indemnity is a specific commitment to compensate the buyer if a defined event or loss occurs — often without the buyer needing to prove general breach principles or demonstrate the kind of loss required to pursue a warranty claim.
Indemnities are typically used where a specific risk has been identified during due diligence or is known to the seller, but where the parties have agreed to proceed with the deal nonetheless. Rather than walking away over that risk, the buyer accepts it on the basis that the seller will cover them if it turns out to be a problem.
Common situations where an indemnity might be sought include:
A known or ongoing tax investigation or assessment
An employee bringing or threatening a tribunal claim
An unresolved dispute with a supplier or customer
A specific environmental liability associated with the business premises
A debt the business owes that the seller agreed to cover
A previous data protection breach under investigation by the ICO
A lease dilapidation claim that may arise on a property
A product liability issue arising from goods sold before completion
A specific item of pending litigation
Workers who may have been incorrectly classified as self-employed
A missing consent or licence that the seller is expected to obtain
Because indemnities are triggered by specific defined events rather than the broader legal test for breach of warranty, they can be more directly useful for buyers where a known risk exists. For sellers, this makes them more significant and often more carefully negotiated. The scope, the cap on liability, and the process for making an indemnity claim all need careful attention.
Common warranty areas
The warranties in a business sale agreement are usually grouped into topics. While the precise scope depends on the deal, the most common areas covered are as follows.
Seller authority
These confirm that the seller has the legal right to sell — that they own the shares or assets, that no third-party consents are required that have not been obtained, and that the transaction does not breach any other agreement the seller has entered into.
Accounts and financial position
Financial warranties are typically among the most important. They may confirm that the accounts disclosed to the buyer were prepared on a proper and consistent basis, that they give a true and fair view, that there are no material undisclosed liabilities, that the debtor and creditor position is as shown, that no unusual payments or distributions have been made, and that the company has not granted any loans or security interests that were not disclosed.
Tax
Tax warranties are often extensive and are sometimes accompanied by a separate tax covenant or tax deed. They may cover the filing of tax returns, payment of all taxes due, the accuracy of the VAT position, PAYE compliance, corporation tax calculations, and confirmation that no tax authority investigations or disputes are pending.
Contracts
Contract warranties confirm that the business's key customer and supplier agreements have been disclosed, that there are no material breaches or termination notices outstanding, that no contracts will be triggered by the change of ownership, and that the business is not dependent on any contract that is not transferable.
Employees and TUPE
Employment warranties are particularly important where staff are transferring with the business. They may cover the accuracy of the employee list, terms and conditions of employment, any outstanding claims or disputes, pension arrangements, and compliance with any statutory obligations. GOV.UK guidance confirms that employees may be protected under the Transfer of Undertakings (Protection of Employment) Regulations 2006 — known as TUPE — when a business changes hands, making this an area that demands careful legal attention.
Assets and intellectual property
These warranties confirm that the business owns, or has the right to use, the assets being sold — including equipment, vehicles, fixtures and fittings, websites, domain names, trademarks, social media accounts and any other intellectual property. They may also address whether any assets are subject to finance agreements or third-party claims.
Data protection
The Information Commissioner's Office makes clear that data sharing during a merger or acquisition, where personal data transfers to a different or additional controller, must be handled carefully and compliantly. Data protection warranties typically confirm that the business has complied with applicable data protection law, that privacy notices and consent mechanisms are in place, and that no data breaches or complaints are pending.
Common indemnity areas
Where due diligence reveals a specific known risk, the buyer may request an indemnity rather than — or in addition to — a warranty. The most common areas where indemnities are sought include:
Pre-completion tax liabilities that may not yet have been assessed
VAT or PAYE arrears not fully reflected in disclosed accounts
A specific customer claim arising from events before completion
An employee or former employee bringing a tribunal claim
An unpaid supplier debt the seller has agreed to resolve
Lease dilapidation claims that may arise after completion
Environmental liabilities associated with the property
A data breach or ICO investigation relating to pre-completion conduct
Product liability claims arising from goods or services provided before completion
A known item of litigation where liability is uncertain
Workers previously engaged as self-employed who may have employment rights
Any consent or licence that was missing and was supposed to be obtained
An indemnity in any of these areas essentially means the seller is saying: "If this specific risk turns into a loss for the buyer, I will cover it." The precise mechanism, limits and procedure for making a claim all need to be set out clearly in the legal documentation.
Disclosure and seller protection
One of the most important tools a seller has when dealing with warranties is the disclosure process. A seller who simply signs a warranty schedule without disclosing exceptions is exposing themselves to claims for matters they may well have known about or been able to identify.
A disclosure letter is a formal document provided by the seller alongside the sale agreement. Its purpose is to set out exceptions and qualifications to the warranties — to disclose matters that would otherwise constitute a breach. For example, if a warranty states that there are no disputes with suppliers, but there is in fact one outstanding supplier dispute, the seller should disclose that dispute specifically and in detail. A proper disclosure can protect the seller from a warranty claim arising from that matter.
The effectiveness of a disclosure depends on its quality. Vague, general disclosures — "the business has various routine commercial disputes from time to time" — rarely provide adequate protection. Disclosures should be specific, identify the relevant warranty, and provide enough detail for the buyer to understand the nature and potential impact of the matter being disclosed.
Sellers should approach the disclosure process seriously and carefully. Before signing the sale agreement, the seller's solicitor should work through every warranty, check whether each statement is accurately true for the business, identify any matters that need to be disclosed, prepare specific disclosures with supporting documents where necessary, and ensure the disclosure letter is completed and provided to the buyer before exchange. Sellers should retain copies of all disclosed documents and correspondence as evidence.
Limits on liability
One of the most heavily negotiated parts of the warranty and indemnity provisions is the question of how much exposure the seller carries, and for how long. Sellers almost always seek to limit their liability, and buyers must consider what limits are commercially acceptable given the risks involved.
Common limitations include:
Financial cap— a maximum total amount the seller can be liable for under the warranties, often set as a percentage of the purchase price or the full price
Time limit— a deadline by which warranty claims must be notified, typically one to three years for general warranties and up to seven years for tax warranties or indemnities
Minimum claim threshold— a floor below which individual warranty claims cannot be pursued
Basket or aggregate threshold— a minimum total level of claims that must be reached before the seller's liability is triggered at all
Exclusions for disclosed matters— protection for anything properly and specifically disclosed in the disclosure letter
Duty to mitigate— a requirement that the buyer takes reasonable steps to minimise their loss before bringing a claim
Knowledge qualifiers— limiting warranties to matters the seller actually knew or ought reasonably to have known about
No double recovery— preventing the buyer from recovering the same loss under both a warranty and an indemnity, or from any other source
Tax covenant limits— separate caps and time limits for tax-specific claims
Claim procedure— specific steps the buyer must follow to notify and pursue a claim
How these limits are set is a matter of negotiation between solicitors. Buyers with a higher risk profile will resist heavy limitations. Sellers in a strong negotiating position will push for them. There is no single right answer — it depends on the deal, the nature of the risks, and the balance of leverage between the parties. The important thing is that both sides understand what they are agreeing to and why.
Buyer and seller practical points
Buyers
The single most important point for buyers is this: warranties are not a substitute for due diligence. Having a warranty in a contract that says "the accounts are accurate" does not protect you in the same way as having reviewed those accounts yourself with the help of a qualified accountant. Warranties may give you a mechanism to claim if something goes wrong — but they cannot undo a bad purchase, and bringing a warranty claim after completion is expensive, time-consuming, and uncertain in its outcome.
Buyers should still carry out thorough due diligence covering accounts and financial records, VAT and tax compliance, customer and supplier contracts, employment matters and TUPE, the lease and any property obligations, physical assets and their condition, outstanding debts and liabilities, data protection compliance, licences and regulatory requirements, and any pending or threatened disputes.
Warranties complement due diligence. They do not replace it.
Sellers
Sellers face a different challenge. The warranties and indemnity provisions in a sale agreement are not standard paperwork. They are legal commitments with real financial consequences. Signing them without careful review is a serious mistake.
Before signing, sellers should read every warranty and understand what it is saying. Any warranty that is not straightforwardly accurate should be identified and either challenged or disclosed against. Sellers should work through the disclosure letter carefully, providing specific and evidenced disclosures where needed. They should understand exactly what each indemnity they are giving commits them to, and negotiate appropriate caps and time limits. And they should make sure their solicitor is closely involved throughout this process.
Sellers should also be realistic about the relationship between price, risk allocation and warranty scope. A buyer who cannot get adequate warranties may insist on a lower price as a risk premium. A seller who provides strong warranties may be able to hold the price — but takes on more exposure if problems emerge later. This trade-off should be weighed consciously, not defaulted to.
Warranties and indemnities checklist
Buyer checklist
Due diligence has been completed across all key areas of the business.
Key risks have been identified through due diligence and are addressed by specific warranties or indemnities.
Warranty coverage matches the areas of risk most relevant to the business.
Any known specific risks are covered by targeted indemnities rather than general warranties alone.
The disclosure letter has been reviewed carefully and any matters disclosed have been assessed for materiality.
Liability limits — caps, time limits and thresholds — have been reviewed and assessed as acceptable.
A solicitor experienced in business sales has been instructed throughout.
Seller checklist
Every warranty in the agreement has been read and checked against the actual position of the business.
Any warranty that is not accurately true has been challenged or qualified.
All relevant exceptions to warranties have been specifically and properly disclosed.
The scope and consequences of every indemnity have been understood.
Financial caps on liability have been negotiated.
Time limits for claims have been agreed.
Evidence supporting key statements has been identified and retained.
A solicitor experienced in business sales has been instructed throughout.
FAQs
Are warranties the same as guarantees?
No. Warranties are contractual statements within the sale agreement — if one proves untrue, the buyer may have a claim for breach of contract. Guarantees, in the legal sense, are a different type of commitment. The terms are sometimes used loosely in conversation, but they have different legal meanings and different consequences.
Are indemnities more dangerous for sellers than warranties?
They can be. Because indemnities are typically linked to specific events rather than a general breach of contract test, they can be easier for a buyer to trigger and harder for a seller to resist. The seller should understand exactly what risk they are accepting under each indemnity before agreeing to it.
Can a buyer bring a warranty claim after completion?
Yes, if the sale agreement allows for it and the claim meets the requirements set out in the agreement — for example, being notified within the permitted time period and exceeding any minimum threshold. Post-completion warranty claims do happen, including in smaller business sales. This is one reason sellers should take the disclosure process seriously.
Does proper disclosure protect the seller?
Proper, specific disclosure against a warranty should prevent the buyer from bringing a claim in respect of the disclosed matter. But vague or incomplete disclosures may not offer the same protection. The quality of the disclosure matters as much as its existence.
Do small business sales need warranties and indemnities?
Generally yes, even if the scope is more limited than in a larger transaction. Any business sale involving material assets, employees, contracts, or leases carries risks that both parties should address. The appropriate level of warranty cover should be proportionate to the deal — but some coverage is almost always advisable. Both parties should take legal advice.
Who negotiates the scope of warranties and indemnities?
This is done between the solicitors for each party. Both buyer and seller should be closely involved in understanding and approving the final position — these are not terms to leave entirely to lawyers without understanding the commercial implications.
Key takeaways
Warranties and indemnities are not legal formalities. They are substantive commitments with real consequences, and they deserve serious attention from both sides in a business sale.
For buyers, warranties are statements that give you a legal backstop if the business turns out to be materially different from what was represented. But they work best when combined with thorough due diligence — relying on warranties alone, without investigating the business properly, is a mistake that can prove very costly.
For sellers, warranties and indemnities represent potential post-completion liability. Read every warranty. Check whether it is accurate. Disclose exceptions properly and specifically. Negotiate limits on your exposure. Understand exactly what each indemnity commits you to. And take proper legal advice throughout.
Doing this well requires solicitors who know business sales. It takes time and it costs money. But getting warranties and indemnities right is one of the most important things either party can do to protect themselves in a business transaction.
Related resources
Important disclaimer
Buy a Business Ltd is a marketplace, not a broker, corporate finance adviser, M&A adviser, law firm, accountant, tax adviser, lender, valuation firm, escrow provider, insolvency practitioner or investment adviser. Information, guides, checklists and examples on this site are for general guidance only and do not constitute legal, tax, financial, investment, lending, valuation, property, employment, data protection, brokerage, corporate finance, M&A or regulated advice.
Business sale terms such as exclusivity, warranties, indemnities, non-compete clauses, retentions, escrow arrangements and break-fee provisions can have legal and financial consequences. You should seek independent professional advice before signing heads of terms, paying money, granting exclusivity, agreeing restrictions or completing a business purchase.
Sources and useful references
GOV.UK: Business transfers, takeovers and TUPE
Acas: What a TUPE transfer is
ICO: Due diligence when sharing data following mergers and acquisitions
Companies House/GOV.UK: Get information about a company
GOV.UK: Business Asset Disposal Relief