What Are Representations and Warranties? | Agency M&A Definition
Representations and warranties are formal statements of fact made by the seller (and sometimes the buyer) in the purchase agreement about the condition and legal standing of the agency. Representations describe the current state of affairs, while warranties promise those statements will remain true through closing. If any representation or warranty turns out to be false, the injured party may have grounds for indemnification or, in extreme cases, unwinding the deal.
Representations and Warranties in Agency M&A
Representations and warranties form the legal backbone of any agency acquisition agreement. They require the seller to formally confirm critical facts: the financial statements are accurate, the agency owns its intellectual property, there are no undisclosed lawsuits, all client contracts are valid and transferable, employees are properly classified, and tax obligations are current. For marketing agencies specifically, several reps carry outsized importance.
Client contract representations matter because agencies often operate on informal arrangements — a handshake deal with a long-standing client or an auto-renewing retainer with no written agreement. Buyers need to know exactly what contractual protections exist. Employee and contractor classification is another hot-button area, since agencies frequently use freelancers and the line between contractor and employee is heavily scrutinized by tax authorities. Intellectual property representations confirm that the agency actually owns the work it has produced and has proper licenses for any third-party tools, stock assets, or software used in client deliverables. Buyers evaluating a creative agency with a portfolio of brand work will want ironclad IP reps confirming the agency is not exposed to infringement claims. The specificity and breadth of reps and warranties often correlate with deal size — a $500K acquisition might have a streamlined set, while a $4M deal could include 30 or more detailed representations.
How Representations and Warranties Affect Agency Valuation
Representations and warranties shape the risk allocation between buyer and seller, which indirectly affects the effective price. Broader, more comprehensive reps give the buyer stronger post-closing remedies if problems emerge, making them more comfortable paying a higher multiple. Conversely, a seller who pushes back heavily on reps — qualifying everything with materiality thresholds and knowledge qualifiers — may signal hidden risks that cause the buyer to reduce the offered price or increase the holdback or escrow amount. The survival period of reps (how long after closing the buyer can bring claims) typically ranges from 12 to 24 months for general reps and up to the statute of limitations for fundamental reps like tax and ownership. Representation and warranty insurance, which covers losses from breached reps, is becoming more common in agency deals above $3M, allowing cleaner exits for sellers.
Example
A buyer acquires a $2.5M-revenue email marketing agency for $3M. The purchase agreement includes a representation that all client contracts are properly executed and assignable. Nine months after closing, the buyer discovers that three clients representing $380K in annual revenue had only verbal agreements, and two of them decline to sign new contracts with the acquiring company. The buyer files an indemnification claim against the $300K holdback, arguing the seller breached the client contract representation. After negotiation, $190K of the holdback is released to the buyer as compensation for the lost revenue, effectively reducing the seller’s total proceeds from $3M to $2.81M.
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