The Reps That Kill Deals in Lower-Middle-Market M&A

I've closed over 500 transactions totaling more than $3 billion in aggregate value. The deals that fall apart almost never die over price. They die over representations and warranties.

Not because the reps are wrong. Because they're written for the wrong deal.

The Template Problem

Here's what happens in a typical lower-middle-market transaction. A buyer's outside counsel pulls their precedent APA from the last deal they closed, a $200 million platform acquisition for a PE fund, and drops it on a $15 million founder-led services business. The rep section runs forty pages. There are reps about ERISA compliance, international trade sanctions, environmental remediation, and mining rights.

The seller's lawyer, who might be a generalist or a litigator doing their first deal, doesn't know which reps matter and which are boilerplate noise. So they object to everything. Or worse, they don't object to anything, and the seller signs reps they can't possibly comply with.

Both outcomes kill deals. The first one creates months of pointless negotiation. The second one creates post-closing liability that the seller never saw coming.

The Reps That Actually Matter

In a lower-middle-market deal, call it $5 million to $250 million in enterprise value, the reps that matter cluster around a handful of areas. These are the ones I spend my time on. Everything else is negotiable.

Authority and enforceability. Can this person actually sell this business? Is the entity in good standing? Are there consents required from other equity holders, lenders, or counterparties? This sounds basic. I've seen deals blow up because a minority member had a veto right nobody disclosed until the third draft of the disclosure schedules.

Financial statements. The seller is representing that their financials are accurate and prepared in accordance with their historical practices. In a lower-middle-market deal, you're rarely dealing with audited GAAP financials. You're dealing with tax returns, internal P&Ls, and QuickBooks reports. The rep needs to reflect that reality. Forcing a $10 million company to represent that its financials comply with GAAP when they never have is setting up a breach before the ink dries.

Material contracts. The seller is representing that the contracts they're assigning or that the buyer is relying on are valid, in force, and not in default. This is where diligence earns its fee. I've pulled material contracts during diligence and found auto-renewal provisions that were about to lock the company into unfavorable terms, change-of-control provisions that let the counterparty walk, and exclusivity clauses that conflicted with the buyer's existing business.

Employees and benefits. Who are the key employees? What are they paid? Are there retention agreements, severance obligations, or change-of-control bonuses? In a lower-middle-market deal, the founder is often the most important employee, and the buyer needs to understand what happens if that person leaves post-closing.

Intellectual property. Does the company own its IP? Were proper assignments executed with employees and contractors? Is there open-source code embedded in proprietary software? For tech-enabled businesses, the IP rep is often the most negotiated section in the agreement because it goes directly to what the buyer is actually purchasing.

Litigation and compliance. Is anyone suing the company? Is the company under investigation? Has it been operating in compliance with applicable law? The compliance rep is the one sellers push back on hardest because no company is in perfect compliance with every applicable law. The negotiation is about where to draw the line. Knowledge qualifiers, materiality thresholds, and specific carve-outs for known issues disclosed on the schedules.

Where Sellers Get Hurt

The most dangerous reps for sellers are the ones that survive closing without adequate limitations. A rep that survives for 24 months with a dollar-one indemnity obligation and no cap is an open-ended liability that can exceed the purchase price.

Every seller-side engagement I run, we negotiate three things aggressively: survival periods, baskets, and caps.

Survival periods define how long the buyer can bring a claim. In the lower-middle-market, 12 to 18 months is reasonable for general reps. Fundamental reps (authority, title, capitalization, taxes) get longer treatment, often the statute of limitations.

Baskets set the threshold before indemnity kicks in. A tipping basket means once the threshold is crossed, the buyer recovers from dollar one. A deductible basket means the buyer only recovers amounts above the threshold. The difference can be worth millions.

Caps limit total indemnity exposure. I generally push for a cap at 10 to 15 percent of the purchase price for general reps. Fundamental reps and fraud are typically uncapped or capped at the full purchase price. The negotiation around where specific reps fall, general versus fundamental, is where the real risk allocation happens.

Where Buyers Get Hurt

Buyers get hurt when they rely on reps instead of diligence. A rep is a contractual allocation of risk. It's not a substitute for actually reviewing the contracts, the financials, and the IP chain of title.

I've seen buyers close on the strength of a clean rep about material contracts without reading the contracts themselves. Six months later they discover a key customer agreement has a termination-for-convenience clause that the customer exercises after learning about the acquisition. The rep was technically accurate. The contract wasn't in default at closing. But the buyer's assumption about revenue stability was wrong because nobody read the termination provision.

Reps protect you when things go wrong. Diligence prevents things from going wrong.

The Disclosure Schedule Problem

Every rep in an APA is subject to a disclosure schedule, the document where the seller lists all the exceptions to its representations. The schedules are where the real story of the business lives.

In the lower-middle-market, disclosure schedules are frequently an afterthought. The seller's lawyer sends a first draft of the APA, the buyer's lawyer marks it up, and three rounds of negotiation happen on the rep language. Then, a week before closing, someone asks the seller to populate the schedules. The seller scrambles to compile information they should have been organizing for months.

This creates two problems. Incomplete schedules create post-closing exposure. If a matter should have been disclosed and wasn't, the seller has breached the rep regardless of whether the buyer knew about it. Overinclusive schedules create a different problem. If the seller discloses every conceivable issue to avoid liability, the buyer loses confidence in the business and starts renegotiating price.

The right approach is to treat the schedules as a diligence deliverable from day one. When I represent sellers, the disclosure schedules are the first document I start working on, not the last. They inform the rep negotiation because you can't negotiate a rep intelligently without knowing what you'd need to disclose against it.

The Point

Reps and warranties aren't legal formalities. They're the mechanism through which buyer and seller allocate every material risk in the business. Getting them right requires knowing the business, not just the law.

A good M&A attorney doesn't hand you a template. They build a rep package that reflects the actual risk profile of the actual deal. That's the difference between a transaction that closes cleanly and one that generates a post-closing dispute before the first earnout payment is due.