When buying or selling a business, it is important to understand Representations and Warranties Insurance (RWI) and how it may affect the overall transaction. RWI is a form of insurance used in mergers and acquisitions to address certain risks that can arise after a deal has closed.

In most business sale transactions, buyers and sellers make a series of representations and warranties in the purchase agreement. These statements typically relate to the financial condition of the business, tax matters, contracts, employees, regulatory compliance, and other key aspects of the company. If one of these representations or warranties is later found to be inaccurate, it may result in a claim.

RWI is designed to provide coverage for certain losses arising from these types of breaches, helping to manage post-closing risk. For buyers, it can offer an additional layer of protection beyond traditional indemnification provisions. For sellers, it may reduce ongoing exposure after closing and limit the need for escrows or holdbacks, allowing for a cleaner and more definitive exit.

While RWI is not appropriate for every transaction, it is commonly used in middle-market and larger deals where risk allocation, certainty, and efficiency are priorities. Coverage terms, exclusions, and costs vary depending on the size, structure, and complexity of the transaction.