Warranties in the Sale of a Company: Key Timeframes and Risks

Liability, Retained Funds, and the Real Closing of the Transaction

When a founder sells their company, they often feel that everything is over at the moment the payment is received. Over the years, I have seen that the legal and economic reality of a transaction is frankly far more complex.

The buyer is not only acquiring the future potential of the business. They also need protection against any contingencies arising prior to closing.

The representations and warranties in the share purchase agreement serve this function. This mechanism allows the buyer to bring a claim against the seller if a pre-transaction issue arises. For example:

▪️ Customer lawsuits
▪️ Tax contingencies
▪️ Employment disputes
▪️ Shareholder conflicts

The emergence of these events months after the sale of a company occurs more frequently than many entrepreneurs anticipate.

Duration of Warranties in M&A Transactions

The Money May Still Be at Risk

In many pre-sale discussions, the same surprise arises.

The purchase price may already be credited to the seller’s bank account. Yet a portion of that amount remains economically exposed for a period of time.

Buyer protection is typically structured through different instruments:

Escrow accounts that retain a portion of the purchase price.
Direct holdbacks agreed upon in the contract.
Bank guarantees covering potential claims.

The key discussion rarely revolves around whether warranties will exist.

The real negotiation focuses on three variables that determine the final economic outcome:

How much money remains subject to liability.
What mechanism secures that amount.
For how long the buyer may bring claims.

I often emphasize that time is the most undervalued variable in a sale.

That factor ultimately defines when the transaction is truly closed from a risk perspective.

Each Warranty Has Its Own Timeline

Not all warranties share the same time horizon.

The type of contingency determines the reasonable duration of liability.

In market practice, fairly predictable patterns appear:

General business warranties lasting approximately eighteen to twenty-four months.
Tax warranties typically extending four to five years due to inspection periods.
Employment and Social Security liabilities with medium- to long-term limitation periods.
Fundamental warranties regarding ownership and capacity to sell, often subject to very long or even unlimited periods.

The release of retained funds usually occurs progressively in line with this timetable.

Emotional Closing Comes Later

Before starting a sale process, many entrepreneurs focus almost exclusively on valuation. Price occupies most of the mental space during the early stages of negotiation. The legal terms that determine how much money remains at risk only begin to receive attention during the Share Purchase Agreement (SPA) phase.

I have repeatedly observed that the emotional closing of a sale rarely coincides with signing or with the initial payment. The real sense of completion arises when the last significant liabilities expire.

Two transactions with the same headline price can produce very different outcomes depending on their temporal exposure.

The True Success of a Sale

A well-balanced transaction combines an appropriate valuation with a reasonable duration of warranties. Reducing years of financial uncertainty can be just as valuable as improving the nominal price.

The quality of a sale is best understood when the risk of having to return money that has already been received disappears entirely. That moment marks the true economic end of the business story built over years of hard work (and sometimes across generations)

By Joshua Novick, partner at Bondo Advisors