Although every seller would like to sell its staffing firm “as is” and walk away from any associated liabilities, few deals get done that way. Instead, subject to negotiated limitations, most buyers expect the seller to be responsible, and make the buyer whole, for certain known and unknown liabilities relating to when the seller owned its business—a concept mergers and acquisitions professionals refer to as indemnification. Indemnification provisions are essential to allocating risk between the parties, are complex, and require careful drafting. The increasing use in recent years of representations and warranties insurance (RWI), either as a supplement to a seller indemnity or as a replacement for a seller indemnity, has heightened the importance of detailed attention to indemnification provisions and to a strong understanding of the constantly changing market.
What Is a Seller Liable for?
A seller is generally liable for any breaches of its representations, warranties, and covenants contained in the purchase agreement. Representations and warranties are written statements the seller makes about itself and the business, which may include, among other things, ownership of equity interests and assets, authority to transact, corporate organization, financial statements and liabilities, customers, contracts, intellectual property, compliance with laws, liens, litigation and claims, taxes, employees, and benefits. Covenants are promises by the seller to take (or not take) specific actions, which may include, among other things, agreements not to compete with the business after closing (typically for three to five years) within a defined geographic area, and not to use or disclose confidential business information. In a typical deal structure, if the seller’s representations and warranties aren’t accurate, or the seller breaches its covenants, it must then indemnify the buyer for any resulting losses the buyer suffers (including attorneys’ fees and litigation costs), subject to certain negotiated limitations.
