If you are buying a business, perhaps a local services company, an e-commerce brand, or a chain of hair salons, it’s easy to think: “This isn’t a billion-dollar Wall Street deal. We don’t need a big legal deep dive, right?”
This is both right and wrong. You don’t necessarily need a comprehensive legal review, but you do need a thorough one, especially if you are purchasing the equity, rather than just the assets. Even small and mid-sized acquisitions can come with unexpected expenses if you skip thorough due diligence. And no, representations and warranties (and the indemnity clauses that come with them) aren’t a magic fix. They’re helpful and necessary, but if something goes wrong, those clauses usually mean you’re paying for it first—and then trying to get your money back later. Good luck with that.
Wait, What Are “Representations and Warranties” Again?
Great question. Here’s the short version:
- Representations and warranties are the seller’s legally binding promises about the business. Think of things like “our financials are accurate” or “we actually own the software we’re selling you.”
- Indemnities are promises to compensate you if those representations and warranties turn out to be false.
In conjunction, think of them like the seller swearing everything is in good shape, and then saying, “Don’t worry, if I’m wrong, I’ll cover it. Scout’s honor.”
But here’s the real issue: once you own the business, you’re legally responsible for any problems that come with it — full stop. That means that if a lawsuit appears at your door, your new company will be the one named as the defendant. You are responsible for the legal defense, the costs, and any damages. This is especially true in an equity purchase (even if the issue started before you bought the business), but it can apply to asset purchases through successor liability theories.
If the seller agreed to indemnify and defend you, then, in theory, you can require them to step in and handle the legal defense. However, even then, you have to track them down and get them to actually do it. And if the indemnity doesn’t include a defense obligation? Then you pay for everything up front: legal fees, court costs, and damages; it is only afterward that can you can try to recover those costs from the seller. That’s assuming they’re still around, solvent, and otherwise able to pay.
So yes, you might technically be protected, and these provisions are “must-haves” in any asset or stock purchase agreement. But practically? You’re still holding the bag, and now you’re chasing someone else to fill it.
Why Due Diligence Is Still a Must-Have (Even for “Simple” Deals)
Due diligence is your chance to verify the story the seller is telling you before you sign on the dotted line and send a wire. It’s how you avoid buying a company with mystery debt, employee lawsuits, expired licenses, or a “proprietary platform” that turns out to be a hacked-together pile of spaghetti code built on someone else’s GitHub.
And if you do find red flags? That’s not a deal killer—it’s a negotiation tool. For example, you can ask the seller to fix it or lower the price to account for the risk. Knowledge is power.
“But This Is a Small Deal. Isn’t Diligence Overkill?”
Nope. Not if you scale it appropriately. Diligence doesn’t have to be a 200-page report. It just needs to be smart, focused, and tailored to the business. It might mean:
- Having a CPA do a quick financial quality-of-earnings check.
- Reviewing key contracts to make sure they’re assignable.
- Checking for unpaid taxes, open lawsuits, or “phantom” equity holders.
- Looking under the hood of any tech the business relies on (or sells).
Even a handful of hours of review by the right professionals can save you from a six-figure mistake … or more.
The Real Cost of Skipping Diligence
Let’s say you skip diligence because the seller “seems trustworthy” and you don’t want to drag out the deal. Six months later, you discover:
- Sales tax liability in three states,
- A now-former employee who’s suing for unpaid commissions,
- And oh yeah, the company’s best customer actually gave a 90-day notice of termination before you bought it.
You open the executed purchase agreement, find the representations and warranties, and think: “Aha! I’m protected!”. Sure… now go try collecting. The seller already moved to Florida, bought a boat, and hasn’t returned your last three emails. Maybe the indemnity clause helps you in court, but meanwhile, you’re the one cutting checks and doing damage control.
TL;DR: Do the Diligence
Representations and warranties and indemnities are essential, but they don’t replace diligence; they’re more like an insurance policy with a high deductible and a tricky claims process. Diligence is what keeps you from needing to file the claim in the first place. So yes, even if you’re buying a “simple” business: do the diligence. It doesn’t have to be overly expensive but skipping it can be.
Whether you’re acquiring your first company or adding another to your portfolio, we can help you navigate the process from diligence to deal terms to closing. No fluff. No unnecessary billable hours. Just smart legal advice scaled to the size and complexity of your potential deal.