Representations and Warranties in Accounting Firm Acquisitions
At their core, accounting firm transactions are built on promises. Sellers promise that the firm’s financials, clients, and compliance status are as represented, and buyers promise to pay an agreed-upon price. Representations and warranties—commonly referred to as “reps and warranties”—are the contractual tools that formalize those promises.
What Are Representations and Warranties?
Representations are statements of fact about the firm’s past and current condition. In an accounting firm sale, these typically cover financial statements, client relationships, licensing, regulatory compliance, and the absence of undisclosed liabilities.
Warranties provide assurances that certain conditions will continue after closing, such as the firm remaining in good standing with state boards, engagement letters staying in effect, and no material issues arising from pre-closing work.
Together, reps and warranties give buyers confidence that the firm they are acquiring matches what was disclosed during due diligence.
What Do They Cover in an Accounting Firm Sale?
Reps and warranties commonly address:
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Accuracy of revenue, accounts receivable, and work-in-process
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Client concentration and recurring revenue
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CPA licensing, registrations, and peer review status
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Compliance with tax and regulatory requirements
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Professional liability claims and insurance coverage
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Validity of client and employee agreements
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Ownership and security of client data
These provisions allow buyers to rely on disclosures rather than independently verifying every detail.
Indemnification and Post-Closing Risk
If a representation is inaccurate or a warranty is breached, the seller may be required to compensate the buyer through indemnification. To manage this risk, accounting firm transactions typically include negotiated limits such as:
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Survival periods that define how long reps and warranties remain enforceable
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Baskets that set minimum thresholds before claims can be made
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Indemnification caps that limit total seller liability
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Escrows or holdbacks to fund potential claims
These terms balance buyer protection with reasonable limits on seller exposure.
Why Language Matters
The wording of reps and warranties is highly nuanced. Small differences—such as statements made “to the seller’s knowledge”—can significantly impact post-closing liability. Careful drafting is especially important in professional services firms, where client issues or regulatory matters may surface later.
Reducing Post-Closing Surprises
Sellers can reduce risk by providing accurate financials, fully disclosing known issues, and working with experienced M&A advisors who understand accounting firm transactions. Some sellers also use representations and warranties insurance to further limit exposure.