Sellers Beware: Buyers Are Asking Founders to Pay Legal Bills for Unproven R&W Claims
When founders sell a company, they often expect the sale proceeds to help take risk off the table for themselves and their investors. But in private M&A deals, buyers are increasingly asking sellers to cover legal defense costs for post-closing claims even when the claim has not been proven or no representation or warranty (R&W) has actually been breached.
That is a meaningful shift in risk, and one that sellers may be blindsided by based on an intuitive sense of how R&Ws should work. Traditionally, a seller is responsible for losses that result from an actual breach of the R&Ws made in the purchase agreement. Those losses may include damages, settlements, attorneys' fees and other defense costs. Aggressive buyers are now pushing for broader language that would require sellers to fund defense costs whenever a third-party claim merely alleges facts that, if true, would amount to a breach. This effectively reduces the R&Ws to a mere diligence exercise and, most importantly, exposes a seller’s proceeds to unnecessary liability for meritless claims. Founders are right to push back against these types of indemnification requirements in business sale transactions.
Why Buyers Are Asking for This
Defense costs can add up quickly. Lawsuits, government investigations and regulatory inquiries often require significant legal spending long before anyone knows whether the claim has merit or whether a seller has actually breached an R&W. Buyers prefer not to bear these expenses and find creative ways to shift them to others.
R&W insurance is the main mechanism for buyers to shift defense costs to a third party. In insured deals, which constitute a growing percentage of transactions (currently 46% of all M&A deals and 76% of deals involving private equity), R&W insurance typically covers defense costs for claims alleging a breach, even if the breach is never ultimately proven. This approach is consistent with an insurer’s duty to defend all claims under other types of insurance policies. For example, insurers routinely cover defense costs related to frivolous slip-and-fall claims under a commercial general liability policy.
Similarly, in an R&W insurance deal, the insurer has priced the risk of defense costs into the policy. The seller may have limited liability exposure for half of the policy’s retention (e.g., deductible), but the structure is designed to shift much of the risk to the insurer.
Why This Matters More in Non-Insured Deals
But not every deal has R&W insurance. In many founder-led, strategic-buyer or smaller private company transactions, R&W insurance is not utilized. In those deals, some buyers are trying to recreate the same protection they would have received from an insurer, but at the seller’s expense and without paying for the insurance. According to the 2025 ABA Deal Points Study, provisions requiring sellers to cover claims alleging a breach of a R&W increased from 17% of deals in 2022–2023 to 27% of deals in 2024–2025.
In a non-insured deal, the economics are very different. If the purchase agreement requires the seller to cover defense costs based only on allegations, the seller may have to write checks before any breach has been established. That can reduce the value of the deal, erode escrowed funds, and force former owners to spend proceeds defending a business they no longer control.
Buyers may argue that, if the claim relates to pre-closing conduct, the seller is closer to the facts and should bear the risk. Claims are typically not fully meritless, and the seller’s past action or inaction led to the claim in some way. Sellers should be careful with that framing. Anyone can make allegations, and the parties have already negotiated the R&W framework that defines the seller’s post-closing liability. If defense costs are triggered by allegations alone, the seller’s negotiated risk profile expands unjustly, and the R&W framework is close to meaningless.
There is also an incentive problem. If the buyer controls the defense but the seller pays the bills, the buyer has less incentive to manage legal costs carefully. That is especially problematic if the seller has limited participation rights or no control over defense or settlement strategy.
Additionally, some claims arise because of the buyer’s identity or the perception that the buyer has deep pockets to settle. As a result, some claims would never be brought against the seller but are filed once a well-funded buyer acquires the company.
How Sellers Should Respond
Sellers should not assume that allegations-based indemnity language is “market” simply because it appears in some insured deals. R&W insurance and seller indemnity are different risk-allocation tools. A provision that may be acceptable when an insurer is paying the bill can be much more problematic when the seller is paying directly.
In non-insured deals, sellers should generally push for indemnity to apply only when there is an actual breach of a warranty. If a buyer continues to insist on some protection for alleged claims, sellers should consider narrowing the provision in the following ways:
Bottom Line
Sellers approach an M&A transaction with clear goals, one of which is to maximize proceeds. Directly at odds with this is the trend of buyers seeking indemnification for defense costs related to unproven breach of R&W claims, which increases the risk that a seller will need to return a portion of its transaction consideration. Sellers and their counsel should negotiate this point carefully, distinguishing between insured and non-insured deals and resisting language that turns unproven allegations into immediate seller liabilities. In certain circumstances, compromise frameworks may be acceptable to push an otherwise good deal across the finish line, but as a matter of principle and economics, sellers are justified in requiring that an actual breach of R&Ws be proven before returning cash to a buyer.
That is a meaningful shift in risk, and one that sellers may be blindsided by based on an intuitive sense of how R&Ws should work. Traditionally, a seller is responsible for losses that result from an actual breach of the R&Ws made in the purchase agreement. Those losses may include damages, settlements, attorneys' fees and other defense costs. Aggressive buyers are now pushing for broader language that would require sellers to fund defense costs whenever a third-party claim merely alleges facts that, if true, would amount to a breach. This effectively reduces the R&Ws to a mere diligence exercise and, most importantly, exposes a seller’s proceeds to unnecessary liability for meritless claims. Founders are right to push back against these types of indemnification requirements in business sale transactions.
Why Buyers Are Asking for This
Defense costs can add up quickly. Lawsuits, government investigations and regulatory inquiries often require significant legal spending long before anyone knows whether the claim has merit or whether a seller has actually breached an R&W. Buyers prefer not to bear these expenses and find creative ways to shift them to others.
R&W insurance is the main mechanism for buyers to shift defense costs to a third party. In insured deals, which constitute a growing percentage of transactions (currently 46% of all M&A deals and 76% of deals involving private equity), R&W insurance typically covers defense costs for claims alleging a breach, even if the breach is never ultimately proven. This approach is consistent with an insurer’s duty to defend all claims under other types of insurance policies. For example, insurers routinely cover defense costs related to frivolous slip-and-fall claims under a commercial general liability policy.
Similarly, in an R&W insurance deal, the insurer has priced the risk of defense costs into the policy. The seller may have limited liability exposure for half of the policy’s retention (e.g., deductible), but the structure is designed to shift much of the risk to the insurer.
Why This Matters More in Non-Insured Deals
But not every deal has R&W insurance. In many founder-led, strategic-buyer or smaller private company transactions, R&W insurance is not utilized. In those deals, some buyers are trying to recreate the same protection they would have received from an insurer, but at the seller’s expense and without paying for the insurance. According to the 2025 ABA Deal Points Study, provisions requiring sellers to cover claims alleging a breach of a R&W increased from 17% of deals in 2022–2023 to 27% of deals in 2024–2025.
In a non-insured deal, the economics are very different. If the purchase agreement requires the seller to cover defense costs based only on allegations, the seller may have to write checks before any breach has been established. That can reduce the value of the deal, erode escrowed funds, and force former owners to spend proceeds defending a business they no longer control.
Buyers may argue that, if the claim relates to pre-closing conduct, the seller is closer to the facts and should bear the risk. Claims are typically not fully meritless, and the seller’s past action or inaction led to the claim in some way. Sellers should be careful with that framing. Anyone can make allegations, and the parties have already negotiated the R&W framework that defines the seller’s post-closing liability. If defense costs are triggered by allegations alone, the seller’s negotiated risk profile expands unjustly, and the R&W framework is close to meaningless.
There is also an incentive problem. If the buyer controls the defense but the seller pays the bills, the buyer has less incentive to manage legal costs carefully. That is especially problematic if the seller has limited participation rights or no control over defense or settlement strategy.
Additionally, some claims arise because of the buyer’s identity or the perception that the buyer has deep pockets to settle. As a result, some claims would never be brought against the seller but are filed once a well-funded buyer acquires the company.
How Sellers Should Respond
Sellers should not assume that allegations-based indemnity language is “market” simply because it appears in some insured deals. R&W insurance and seller indemnity are different risk-allocation tools. A provision that may be acceptable when an insurer is paying the bill can be much more problematic when the seller is paying directly.
In non-insured deals, sellers should generally push for indemnity to apply only when there is an actual breach of a warranty. If a buyer continues to insist on some protection for alleged claims, sellers should consider narrowing the provision in the following ways:
- Limit the types of covered claims. Coverage could be limited to claims where the seller has particular visibility or responsibility, such as claims by former equity holders or specific concerns uncovered during the buyer’s diligence.
- Require cost sharing while the claim is pending. If liability has not yet been determined, the buyer and seller could share defense costs until it is clear whether a breach occurred. This keeps both sides focused on managing costs efficiently.
- Match payment responsibility with defense rights. If the seller is paying the defense bill, the seller should have control rights over the defense and settlement of the claim.
- Apply negotiated caps, baskets and escrows. Defense costs should count toward the agreed indemnity limitations. They should not sit outside the liability cap or bypass the escrow.
- Require a true-up if no breach is found. If the seller advances or shares defense costs and the claim does not result in an indemnifiable breach, the buyer should reimburse the seller.
Bottom Line
Sellers approach an M&A transaction with clear goals, one of which is to maximize proceeds. Directly at odds with this is the trend of buyers seeking indemnification for defense costs related to unproven breach of R&W claims, which increases the risk that a seller will need to return a portion of its transaction consideration. Sellers and their counsel should negotiate this point carefully, distinguishing between insured and non-insured deals and resisting language that turns unproven allegations into immediate seller liabilities. In certain circumstances, compromise frameworks may be acceptable to push an otherwise good deal across the finish line, but as a matter of principle and economics, sellers are justified in requiring that an actual breach of R&Ws be proven before returning cash to a buyer.