Latest / The Acquisition Talk with Fexingo: Mergers, Buyouts, and Business Sales for Operators / How the Buyer Rep Letter Changed M&A Forever
Transcript
- Lucas: There's a document in M&A that almost nobody outside the deal room has heard of, but it has quietly reshaped how every acquisition above a certain size gets negotiated. It's called the buyer representation letter. Luna: I've heard the term, but I don't think I've ever actually seen one. What does it do? Lucas: It's essentially a certification from the buyer's side — a letter signed by the acquiring company's CEO or CFO that confirms they've done their due diligence, that they're not relying on any representations from the seller outside the purchase agreement, and that they have the financial wherewithal to close. It sounds like administrative boilerplate, but it came out of a specific SEC rule change in early 2023. Luna: Right, the SEC was tightening rules around private funds and SPACs around then. Was this part of that wave? Lucas: Exactly. The rule was aimed at preventing buyers from later suing sellers based on informal statements made during negotiations — 'the rep letter' forces the buyer to say: we relied only on what's in the contract. And here's the kicker — once the letter is signed, it becomes a deliverable at closing. If the buyer doesn't sign it, the seller can walk away without penalty. Luna: So it flips leverage. Suddenly the seller has a documented off-ramp if the buyer gets cold feet or tries to renegotiate at the table. Lucas: That's exactly what happened in a deal I followed last year: a $7.4 billion acquisition of a midsize industrial roll-up based in the Midwest. The buyer — a large private equity firm — tried to invoke a material adverse change clause after a quarterly earnings miss. The seller pulled out the rep letter and said, 'You certified your due diligence. You knew the business cycle. Close or we keep your earnest money.' Luna: And the buyer closed? Lucas: They closed. But the real shift happened in the indemnity negotiations. Before the rule, a typical indemnity tail in a deal that size was 18 months. After the letter became standard, sellers started demanding 60-month tails — five years — on fundamental reps like title, tax, and capitalization. Their argument was: 'You signed a letter saying you did full diligence. If you find a problem five years from now, it's on you.' Luna: That's a huge change. A five-year tail completely changes the risk profile for the buyer. They have to hold reserves for much longer. Lucas: And the escrow numbers shifted too. Before the rule, it was common to see escrows of 10 to 15 percent of purchase price held for 18 months. Now, in deals where the rep letter is used, escrows are trending toward 20 to 25 percent, often held for the full indemnity period. That's tens of millions of dollars tied up. Luna: But not every deal uses the letter, right? I thought there was a size threshold. Lucas: Correct. The rule applies to acquisitions where the purchase price exceeds a certain threshold — initially set at $100 million, though it's adjusted periodically. Below that, the letter is optional. What we've seen is a bifurcation: deals under $100 million often skip the letter entirely, and the indemnity terms look more like the old days. Luna: So for small business acquisitions — main street, indie brands — this rule doesn't really apply? Lucas: Not directly. But the market dynamic has shifted because the larger deals set the tone. Lawyers who work on smaller deals start recommending rep letters anyway, because it reduces their liability. I've seen letters in deals as small as $15 million now. Luna: That feels like regulatory creep — a rule meant for big private equity deals bleeding into middle-market transactions. Lucas: It is. And it's created a new kind of friction. Some private equity firms have started structuring acquisitions as a series of smaller add-ons to stay under the threshold. Instead of buying a $200 million platform, they'll buy a $90 million platform and do three $30 million add-ons, each without the letter, keeping the indemnity window shorter. Luna: So they're gaming the regulation. But doesn't that increase transaction costs? More deals, more legal fees. Lucas: It does. But the trade-off is favorable for them. A shorter indemnity tail means less capital tied up in escrow, and that capital can be deployed into the next deal. For a firm that does five acquisitions a year, that difference can add up to tens of millions in freed-up cash. Luna: I want to go back to the seller's perspective for a second. If I'm selling my company, and the buyer signs a rep letter, does that actually protect me? Lucas: It does, but not perfectly. The letter protects the seller from post-closing lawsuits based on off-the-record statements — things said in management presentations or emails that aren't in the purchase agreement. But it doesn't shield the seller from fraud claims. If the buyer can prove the seller intentionally misrepresented something, the letter doesn't matter. Luna: So the letter essentially forces all representations into the four corners of the contract. That raises the stakes on the drafting process. Lucas: Massively. The negotiation of the purchase agreement becomes even more intense because every representation has to be precise. Vague language like 'the company has no material liabilities' gets replaced with specific schedules listing every known liability. The deal documents have gotten longer — I've seen purchase agreements go from 80 pages to 150 pages since 2023. Luna: And that drives up legal costs. But I suppose for the seller, it's worth it if it reduces the chance of a post-closing lawsuit. Lucas: Exactly. And there's another angle: the rep letter has also changed how buyers approach due diligence. Because the letter certifies that diligence was done thoroughly, buyers are now more systematic about documenting every step. We're seeing more use of virtual data rooms with timestamped access logs, and third-party diligence reports are becoming standard even in smaller deals. Luna: It's almost like the letter professionalized the process. You can't just do a quick look and hope for the best anymore. Lucas: That's exactly right. And it's one of those rare regulatory changes that actually improved market efficiency. The bad actors — buyers who would later sue on flimsy grounds — have less room to operate. The good actors benefit from clearer rules. Luna: But what about the downside? Is there any criticism of the letter? Lucas: The main criticism is that it adds a layer of formality that can slow down deals, especially in hot markets where speed matters. I talked to a midmarket investment banker who said they lost a deal because the buyer's legal team spent three weeks negotiating the rep letter language, and the seller got impatient and went with a cash buyer who waived the letter entirely. Luna: So in a competitive auction, waiving the letter can be a differentiator. That's a real trade-off. Lucas: It is. And it's created a new kind of risk calculation. Some buyers are willing to accept a longer indemnity tail in exchange for not having to sign the letter, because the letter brings its own legal exposure — if the buyer signs it and later misses something, they can't claim they were misled. Luna: That reminds me of something I read — a survey from the American Bar Association's business law section. They found that in 2025, about 60 percent of deals over $100 million included a buyer rep letter, but only about 20 percent of deals between $50 and $100 million did. Lucas: That squares with what I'm seeing. The threshold really does create this sharp divide. And it means that if you're selling a company worth, say, $80 million, you might have two very different deal experiences depending on whether the buyer is willing to sign the letter. Luna: What about cross-border deals? Does the SEC rule apply if the buyer is a foreign entity? Lucas: That's a grey area. The SEC's rule applies to transactions that have a sufficient nexus to the U.S. — typically if the target is a U.S. company or the buyer is a U.S. person. But if both parties are foreign and the deal doesn't touch U.S. markets, the rule doesn't apply. However, many foreign buyers voluntarily adopt the letter because U.S. sellers expect it. Luna: So it's becoming a market standard even where it's not legally required. That's how these things tend to evolve. Lucas: Exactly. And I think we'll see more of that. The real question is whether the SEC will lower the threshold or even eliminate it. They've hinted at reviewing the rule in late 2026, and there's speculation they might drop the threshold to $50 million or require the letter for all deals involving a material amount of debt financing. Luna: That would be a seismic shift for the middle market. A lot of family-owned businesses that sell in the $50 to $100 million range would suddenly have to navigate this. Lucas: It would. And it would likely push more sellers toward earnouts as a way to bridge the trust gap. But earnouts have their own problems, as we've talked about before. Luna: Yeah, we did a whole episode on that. The failure rate is high. Lucas: Right. So the rep letter isn't a panacea, but it's one of those quiet structural changes that shapes how deals get done. And for anyone thinking about selling a business in the next few years, understanding it is crucial. Luna: I'd add that even if you're a buyer, you need to know how the letter affects your leverage. It's not just a compliance checkbox. Lucas: Exactly. And look, conversations like this are exactly why we do this show. If these deep dives have helped you think more clearly about a deal you're working on, or even just understand the landscape better, that's the goal. And a handful of listeners actually chip in monthly to make sure we can keep doing this — no ads, no sponsors, just well-researched M&A talk. They do it through buy me a coffee dot com slash fexingo. Luna: It's true. That support is what lets us spend the time on episodes like this, digging into the documents that most people skip past. It's genuinely appreciated. Lucas: So, back to the rep letter — one last thing I want to flag. If you're a seller and your buyer asks you to sign a representation letter on your side — a seller rep letter — that's a different document entirely. That one is about the seller confirming the accuracy of their own reps. It's symmetrical, in a way. Luna: Right, so the buyer rep letter is from the buyer to the seller, and the seller rep letter is from the seller to the buyer. They're mirror images. Lucas: Exactly. And in some deals, both letters are required. That's becoming more common in large transactions. The key takeaway is that the buyer rep letter, in particular, has changed the game for indemnity and escrow. If you're entering a deal over $100 million, expect it. If you're below, be aware that it might show up anyway. Luna: And if it does, negotiate the tail and escrow terms early. Don't leave it to the last minute. Lucas: Exactly. That's the practical takeaway. The letter itself is just a piece of paper, but the consequences ripple through every term of the deal.