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Warranty and Indemnity

Definition - What does Warranty and Indemnity mean?

A warranty and indemnity is used when a business is bought or sold. Though both terms are closely related, they have differences. A warranty is a statement made by the seller at the time of sale that is factual and true. An indemnity, on the other hand, is a promise the seller makes at the time of sale to help the buyer make up any losses in case of the occurrence of a particular event.

Divestopedia explains Warranty and Indemnity

Warranties and indemnities are include in a purchase and sale agreement at the time of sale and offer many advantages for the buyer. Firstly, they offer some form of compensation for buyers as it is not possible for the buyer to understand all the intricate aspects of the business at the time of purchase. Secondly, every company has its own liabilities and debts, so when another company buys it, the latter acquires all of these liabilities as well. Some of these liabilities may be known, but some could also be unknown. Thirdly, the law does not provide much protection for the buyer for such a transaction. So, it is only natural that buyers expect such protection from sellers in the form of warranties and indemnities.

The difference between a warranty and an indemnity is most evident at the time of making a claim for compensation. A breach of warranty will be acknowledged and the necessary compensation will be given only if the breach was shown by the buyer and its financial impact of the same is proved by the buyer. In other words, the onus to prove a breach of warranty is on the buyer. Indemnity, on the other hand, gives compensation in cases that are not covered by a breach in warranty. It also provides compensation or any other remedy in situations where legal help is not available to the buyer. In this case, the onus is not on the buyer as the indemnity agreement implies that financial compensation will be provided to the buyer in any legal claim.

A final difference is that the seller is obliged to mitigate the loss for the buyer under a warranty, but there is no such obligation in the case of an indemnity.

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