Definition
THE Asset and liability guarantees (GAP)Or Reps & Warranties in English, are the commitments made by the seller of a company towards the buyer during a transfer.
They certify that the financial, legal and operational information communicated is accurate as of the closing date (Completion Date).
If a discrepancy appears after the sale, for example a hidden liability (hidden liability) or a undisclosed tax exposure, the buyer can request compensation for the damage suffered according to the terms of the contract (Share Purchase Agreement – SPA).
Why are GAPs crucial?
- Securing the deal (Deal security): they ensure the reliability of the information transmitted.
- Reduced risk of asymmetry (Information asymmetry mitigation): they balance seller/buyer positions.
- Valuation key (Valuation driver): a clear warranty system improves confidence and can support the price.
- Signal of seriousness (Credibility signal): a seller ready to guarantee demonstrates his transparency.
Operational issues
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Validity period (Survival period): generally 12 to 24 months, sometimes up to 5 years for tax guarantees (Tax warranties).
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Trigger thresholds (De minimis threshold, Basketball): minimum and aggregate amount before activation of compensation.
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Compensation ceiling (Cape): maximum limit of seller’s liability, often 10 to 30% of the transfer price.
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Enforcement mechanisms :
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Escrow account → Escrow account
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Price withholding → Holdback
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W&I Insurance (Warranty & Indemnity Insurance) → W&I policy
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Post-closing complaint (Claim notice procedure): formalities for notifying the dispute.
GAP vs. W&I Insurance
| Appearance | GAP (Reps & Warranties) | W&I Insurance |
|---|---|---|
| Risk | Supported by the seller (Seller liability) | Transferred to the insurer (Risk transfer) |
| Direct cost | Included in the valuation | Insurance premium (0.5–1.5% of deal) |
| Negotiation | Direct between seller and buyer | Tripartite (buyer, seller, insurer) |
| Relational impact | Can generate tension | Streamlines the closing |
| Use | Majority in small/mid cap | Standardized above €20–30 million |
The future of GAP
The evolution of Reps & Warranties tends towards more contractual standardizationsupported by the AI-powered due diligence tools and the dynamic data rooms. The increasing use of W&I insurance and seller audits (Vendor Due Diligence – VDD) in the mid-market reduces the financial scope of GAPs, but reinforces their central role: establish trust and accelerate certainty of deal execution (Deal certainty).
