The warranties and indemnities section of a business sale contract is where sellers are most likely to sign up for obligations they didn’t fully understand. Warranties are factual statements you make to the buyer about your business — that the financial statements are accurate, the business is legally compliant, that contracts are valid and binding. Indemnities are direct payment obligations you assume if specific events occur or claims arise after settlement. Together, they define what you remain on the hook for after you hand over the keys.
This isn’t something to leave entirely to your lawyers. You’ll be the one who signs the contract.
What Are Warranties in a Business Sale?
A warranty is a statement of fact in the sale contract that you, as the seller, are affirming to be true. You’re saying: this is accurate about my business as at completion, and if it turns out not to be true, I’ll compensate you for any loss that flows from that.
In Australian business sales, warranties typically cover:
- Financial accuracy — the financial statements present a true and fair view of the business’s position and performance
- Tax — all returns have been lodged correctly, all liabilities are paid, no outstanding disputes with the ATO
- Employees — entitlements (leave, super, redundancy) are correctly recorded and paid up to completion
- Material contracts — key contracts are valid, binding, and won’t be terminated or varied as a result of the sale
- Compliance — the business holds all required licences and isn’t in breach of applicable laws
- Litigation — no undisclosed legal proceedings are current or pending
- Intellectual property — you own or have rights to use the IP that runs the business
- Assets — the assets in the sale schedule exist and aren’t subject to undisclosed encumbrances
For a $2 million trade business sale, you might be giving 20 to 30 individual warranty statements. A $10 million professional services firm might see 50 to 60. The number itself isn’t the issue — the scope and the exceptions are where the risk sits.
One quotable principle for sellers: the broader the warranty, the more important your disclosure letter becomes. More on that below.
What Are Indemnities and How Are They Different?
This distinction matters and doesn’t always get explained clearly.
A warranty is a statement. If that statement is incorrect, the buyer has a breach of warranty claim — but they still have to prove it, and they have to demonstrate actual loss flowing from the breach. It’s not an automatic entitlement.
An indemnity is a payment obligation. If the specified event occurs, you pay — without the buyer needing to establish loss in the same way. The trigger is the event, not the consequence.
A tax warranty might say: “There are no undisclosed tax liabilities as at completion.” If the ATO later raises an assessment for a period before settlement, the buyer has to bring a breach of warranty claim, prove the warranty was false, and prove they suffered a loss. That’s a process with friction and uncertainty.
A tax indemnity would say: “The seller shall indemnify the buyer for any income tax liability arising from the period prior to completion.” If the assessment arrives, you write a cheque. No argument about whether you’re liable — the indemnity already answers that.
Indemnities are generally the more serious obligation, and sellers typically resist them or try to narrow them specifically. A general indemnity for all pre-completion tax liabilities is quite different from a specific indemnity covering one known regulatory matter. If your contract includes a broad indemnity, make sure you understand what it covers.
Common Seller Warranties in Australian Business Sales
While the specifics vary by deal size, industry, and negotiating position, most Australian SME sale contracts include some version of the following categories.
Financial warranties cover whether the accounts were prepared in accordance with Australian Accounting Standards and whether they present a true and fair view. These also typically cover the accuracy of normalisation adjustments — the add-backs and one-off exclusions used to calculate the sale price. If a buyer paid a multiple of adjusted EBITDA and later discovers the adjustments were wrong, this is where their claim begins.
Tax warranties cover lodgement, payment, and compliance — and usually include a representation that the business isn’t a party to any tax scheme the ATO could challenge. In asset sales, this is typically less fraught than in share sales, where the buyer inherits the company’s entire tax history. If you’re selling shares, expect the tax warranty and indemnity package to be more extensive. See the asset sale versus share sale guide for the structural difference.
Employment warranties are a common source of post-settlement claims in Australia (which should not be surprising to anyone who has spent time with payroll records). Super guarantee underpayments, incorrect leave accruals, unreported workers’ compensation matters — these are the things that surface 12 months after settlement when someone finally runs a proper audit. Make sure your entitlements are reconciled before you enter due diligence, not after.
Contract warranties state that key agreements are valid, binding, and won’t be terminated by the sale without consent. For many businesses, the biggest single risk is a key contract that includes a change-of-control clause — a provision that lets the other party exit the agreement if ownership changes. Identify those contracts early and get the consents sorted before completion. The due diligence checklist covers what buyers will check.
Warranty Caps and Limitation Periods: How to Protect Yourself
Warranties don’t have to mean unlimited exposure. In most Australian business sale contracts, sellers negotiate two key protections: a liability cap and a time limit on claims.
The warranty cap is the maximum amount the buyer can recover in total for all warranty breaches combined. In Australian SME transactions, caps typically range from 50% to 100% of the purchase price. Buyers in higher-risk deals (complex financials, heavy regulation, pending litigation) push for 100%. Sellers who have done thorough preparation — clean accounts, a solid disclosure letter, clear due diligence — are better positioned to negotiate the cap down to 50% or lower.
The warranty period sets how long after completion the buyer can bring a claim. Standard positions in Australian deals:
- General warranties: 18 to 24 months
- Tax and fundamental warranties: 4 to 7 years (aligning with the ATO’s audit window)
There are also usually minimum claim thresholds — buyers can’t bring a warranty claim for minor amounts (often expressed as 0.5% to 1% of the purchase price). This prevents death by a thousand papercuts.
The rule of thumb that holds across most deals: every dollar invested in preparation and disclosure before signing is worth roughly ten dollars in avoided warranty liability. It’s not a precise ratio. It’s a frame. Sellers who treat warranties as a legal formality and rush through them end up with exposure; sellers who treat them as a risk management exercise don’t.
The Disclosure Letter: Your Most Important Protection
If there’s one thing in this article worth dwelling on, it’s this.
Every warranty you give in a sale contract is given subject to what you disclose. A disclosure letter is the document you provide to the buyer before completion that qualifies each warranty against specific, known facts. If the buyer accepts the disclosure and completes the transaction anyway, they generally can’t later claim breach on that disclosed matter.
A thorough disclosure letter turns broad warranty language into a defined, manageable set of actual obligations.
I worked with a Perth-based owner selling a civil contracting business — $8 million price, strong numbers, clean business overall. He knew there was one subcontractor dispute that had been simmering for two years; it was unlikely to crystallise but it was there. His lawyers disclosed it explicitly in the disclosure letter, with all the supporting correspondence attached. The buyer completed. Eighteen months later, the dispute did result in a modest liability. The buyer couldn’t recover from the seller — the disclosure had been clear and complete, and the buyer had elected to proceed (which is more than most sellers manage to organise in time).
That outcome doesn’t happen by accident. It requires someone sitting down with the disclosure letter before signing and working through each warranty statement carefully.
The disclosure letter is not a list of admissions. It’s risk management.
Warranty and Indemnity Insurance
A lot of Australian SME sellers don’t know this option exists, which is a shame because it changes the deal structure in ways that benefit them.
Warranty and indemnity insurance (W&I insurance) is a policy — usually taken out by the buyer — that covers losses from warranty or indemnity breaches. Instead of chasing the seller directly after settlement, the buyer claims on the policy. The insurer has subrogation rights against the seller in cases of fraud, but for ordinary warranty breaches, the buyer deals with the insurer.
Why does this matter to you? Because W&I insurance allows you to negotiate a cleaner exit. Without it, buyers typically want to hold 10 to 15% of the purchase price in escrow for 12 to 24 months as security against warranty claims. With a W&I policy in place, you can push back on that — the policy covers the gap, and you get paid in full at settlement.
W&I insurance in Australia has historically been for private equity transactions and large deals. It has come down market significantly over the past five years. Premiums typically run between 1% and 2% of the insured limit — on a $10 million deal, that’s $100,000 to $200,000 in premium cost for the buyer. Not trivial, but often worth it for the cleaner structure it creates.
Not every deal qualifies. Insurers assess the quality of the due diligence process, the disclosure letter, and the business’s risk profile before underwriting. But for transactions above around $5 million where the seller wants a clean break and minimal post-settlement exposure, it’s worth raising with your advisor early.
What Sellers Get Wrong
A few patterns come up in deals more often than they should.
Giving warranties about things you don’t actually know. You can’t warrant that “all contracts are valid and enforceable” if you’ve never had them reviewed by a lawyer. The fix is to carve out what you genuinely don’t know — not to guess and hope.
Underestimating the tax warranty. The ATO has four years from lodgement to audit a return in ordinary cases, seven years if it suspects fraud or evasion. If you’re selling shares, a buyer can theoretically bring a tax warranty claim years after settlement. Make sure any tax indemnity is properly time-limited, and that your pre-sale accounts are clean before you go to market.
Agreeing to liability outside the cap. Buyers sometimes try to carve warranties related to fraud or title outside the cap — that’s standard. What’s not standard is buyers trying to exclude additional categories (environmental matters, employment, IP). Know exactly what your cap covers and what’s excluded.
Not reading the disclosure letter properly. Your lawyers draft it; you sign it. If a disclosure is incomplete or inaccurate, and the buyer relied on it, you’re exposed. It’s worth spending two hours going through it line by line before you sign.
The full picture of how warranties fit into the broader sale process is covered in the M&A process guide. Warranties typically come up for the first time in the heads of agreement stage, where some buyers try to include broad warranty commitments before the formal contract — and before you’ve had time to think carefully about what you’re agreeing to.
If you’d like to talk through what a warranty package typically looks like for a business like yours, or you’re in the process of reviewing a contract, get in touch with Miro Capital. We work alongside your legal and accounting advisors to make sure the deal structure works in your interest.
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