Reps, warranties, and compliance indemnities

What reps and indemnities do

They allocate the risk of what diligence could not find. The buyer checks what it can. For the rest, the seller states the facts in the agreement, lists exceptions on disclosure schedules, and agrees to pay if a statement was wrong.

Cannabis raises the stakes in two ways. A breach can cost more than money: an undisclosed owner or a falsified tracking record can threaten the license itself. And the usual outside backstops are missing. One M&A partner observes that post-closing escrows are rare in cannabis because national bank escrow agents are unavailable, and that insurers have largely stayed away.

Which cannabis-specific reps should a buyer ask for?

Rep	What the seller states	Why it matters
License standing	Each license is valid, renewed, not subject to suspension, revocation or pending discipline; all fees paid	The license is the asset
Compliance history	All notices of violation, inspections, fines and corrective plans for a stated look-back period are scheduled	Regulators weigh history at renewal and on the buyer’s application; see how compliance history affects value
Ownership and control	Every owner, financier and party with control or profit rights has been disclosed to the regulator; no side agreements	Hidden interests are a revocation risk; see true party of interest rules
Track-and-trace	System records are accurate and reconcile to physical inventory; no unexplained adjustments or destroyed-product anomalies	Discrepancies become the new owner’s to explain; see track-and-trace systems and transactions
Inventory	Product is tested, tagged, within date, saleable, and sourced only from licensed suppliers	See inventory and biomass at closing
Local approvals	Conditional use permit, local license, host or community agreement in good standing; no unpaid local fees	Local consent is often separate from state approval
Premises	Built and operated as shown on the approved floor plan; security system meets the rules; no unapproved modifications	Unapproved changes surface at the buyer’s first inspection
Tax	All federal and state returns filed; 280E applied as required or positions disclosed; excise and sales tax paid; no liens or payment plans undisclosed	Often the largest hidden liability
Employees	Badges current; wage-and-hour compliance; no union petition or undisclosed labor peace obligation
Banking and cash	All accounts disclosed; cash handled and recorded under written procedures; no use of misdescribed accounts	A closed bank account can stop operations
Products and marketing	No recalls; packaging, labeling and advertising within state rules

Sellers should not give a flat rep of compliance with all laws. Every plant-touching business violates the federal Controlled Substances Act to some degree, even after the April 2026 rescheduling of state-licensed medical marijuana. The standard fix is to carve federal cannabis law out of the compliance rep and have both parties acknowledge it.

What are market norms for caps, baskets and survival?

The best public data is cross-industry. The ABA’s 2025 Private Target Deal Points Study reviewed 139 agreements from 2024 and early 2025:

Term	Finding
Deals using representations and warranties insurance	63%, up from 55% in the prior study
Median seller indemnity cap with insurance	0.25% of transaction value
Traditional cap without insurance	8% to 12% of transaction value over the last decade
Post-closing price adjustment	90% of deals; 58% used a separate adjustment escrow
Non-reliance clause	81%
Agreement silent on sandbagging	68%
Fraud carve-out limited to reps in the agreement	70%

SRS Acquiom’s 2026 study of more than 2,300 private-target deals closed from 2020 to 2025 separately reports a marked uptick in escrow size.

Read these with care. The sample is mid-market deals, mostly larger than a single-license cannabis sale, and the insured majority does not describe cannabis. Private cannabis deals resemble the uninsured minority, and buyers often argue for caps above the traditional range on compliance and tax reps because the downside is loss of the license. Reported cannabis holdbacks run 12 to 24 months.

A common architecture:

• General reps. Deductible basket, cap at a negotiated percentage of price, survival of 12 to 24 months.
• Fundamental reps such as title, authority, capitalization and brokers: no basket, cap at the purchase price, long survival.
• Tax reps. Survive until the statute of limitations expires. For federal income tax that is generally 3 years from filing, or 6 years where more than 25% of gross income was omitted.
• Regulatory compliance reps. Frequently negotiated as a middle tier: higher cap and longer survival than general reps.
• Fraud. Uncapped, defined as deliberate misstatement in the agreement’s reps.

Illustrative indemnity calculation

A $3,000,000 dispensary sale has a deductible basket of $22,500 (0.75%), a general cap of $300,000 (10%), and a $300,000 holdback for 18 months.

Eight months after closing, the state audits a pre-closing period and assesses $60,000 of excise tax and penalties. At the next inspection, the regulator fines the business $25,000 for pre-closing camera-coverage gaps. Total losses: $85,000.

Step	Amount
Total losses	$85,000
Less deductible basket	$22,500
Recoverable from seller	$62,500
Paid from holdback	$62,500
Holdback remaining for release at month 18	$237,500

If the agreement treated taxes as a separate first-dollar indemnity, the basket would apply only to the $25,000 fine, and recovery would be $60,000 plus $2,500.

Backing the indemnity with money

An indemnity is worth what can be collected. Options, from strongest to weakest for the buyer:

1. Cash holdback retained by the buyer or a willing escrow agent. See staged closings and escrow pending approval.
2. Set-off against a seller note or earn-out. Sellers should limit set-off to finally determined claims, or require disputed amounts to be paid into escrow. See seller notes and security interests.
3. Personal guaranty from the seller’s owners.
4. An unsecured promise from a selling entity that will distribute its cash and dissolve.

Tax exposure deserves its own reserve, sized by a CPA. In California, a buyer who fails to obtain sales-tax clearance can be personally liable up to the purchase price. Sizing is covered on tax liabilities and holdbacks in a sale.

Knowledge, disclosure and sandbagging

• Knowledge qualifiers. Sellers want reps limited to what named people actually knew. Buyers should accept this for matters outside the seller’s control, such as threatened investigations, and refuse it for facts the seller should know, such as whether taxes were paid.
• Disclosure schedules. The schedules are where most of the real negotiation happens. A seller that has run a compliance audit before a sale can disclose precisely and avoid later claims.
• Sandbagging. Can a buyer claim for a breach it knew about before closing? With 68% of agreements silent, the answer depends on state law. Say it expressly one way or the other.
• Non-reliance. With 81% of agreements disclaiming reliance on statements outside the contract, anything the buyer was told in a management meeting or a data-room summary should be converted into a rep if it matters.
• Bring-down. Reps are made at signing and again at closing. In cannabis the gap can be many months, so the seller should have a right to update schedules for new events, and the buyer a right to walk or reprice if the update is material. See regulatory-approval contingencies.

What reps does the buyer give?

Fewer, but they matter to a seller waiting months for approval:

• Each proposed owner is eligible for licensure, with no disqualifying history, and has disclosed all other cannabis interests that count against ownership caps.
• Funds are available and come from lawful, documentable sources.
• The buyer will file on time and respond to regulator requests.
• If the price includes stock or a note, reps about the issuer’s or maker’s financial condition.

A buyer-side breach that causes denial should cost the buyer its deposit.

Structure changes the package

In an equity purchase the company keeps every historic liability, so the reps and indemnities do all the work. In an asset purchase, excluded-liability language does some of it. The comparison is on asset sale vs membership-interest sale. This page is general education, not legal advice.