When selling your company, one of the most important sections of the purchase agreement is the representations and warranties. These are the statements and promises you make to a buyer about your business—its assets, operations, contracts, finances, and liabilities—at the time of sale. They give the buyer confidence that what they’re buying is exactly what they expect. If a statement later proves false, the buyer can seek compensation under the indemnification provisions of the agreement.
Due Diligence and Disclosure
Before closing, buyers conduct due diligence—a deep dive into your company’s records, contracts, and financials. This process determines what representations and warranties appear in the purchase agreement. Sellers typically provide a disclosure schedule listing exceptions to these representations (for example, permitted liens, known lawsuits, and contract limitations). Complete and accurate disclosure helps limit post-closing disputes and protects the seller from future claims.
Risk Allocation and Survival Periods
Representations and warranties are the core of risk allocation in a deal. Together with disclosure schedules, survival periods (how long a buyer can bring a claim), and indemnification provisions, they define who bears the financial risk if something goes wrong after closing.
- Fundamental representations (like ownership of the company) often survive indefinitely.
• General representations (like accuracy of contracts) may survive for 12–18 months.
• Buyers and sellers also negotiate baskets (minimum claim thresholds) and caps (maximum liability limits) to manage exposure.
Stock vs. Asset Sales
In a stock or equity sale, the buyer purchases the entire company—including all assets and liabilities—so representations cover the business as a whole. In an asset sale, the buyer purchases selected assets and assumes only specified liabilities, so each asset and obligation must be clearly listed. For example, a vendor debt not disclosed in an asset deal stays with the seller.
Common Representations and Warranties
Most agreements include representations covering:
- Organization and Authority – confirming the company is validly formed and authorized to sell.
• Capitalization – confirming ownership and outstanding equity interests.
• Financial Statements and Liabilities – ensuring accuracy and completeness.
• Material Contracts, Customers, and Suppliers – verifying key agreements are enforceable and principal terms.
• Taxes and Legal Compliance – assuring all filings, payments, and regulations are current.
• Intellectual Property, Real Estate, and Insurance – confirming ownership and coverage.
• Employment and Benefits – ensuring compliance with labor and benefit laws.
Practical Tips for Sellers
- Be transparent: Fully disclose exceptions to avoid post-closing claims.
• Use qualifiers: Terms like “to the seller’s knowledge” or “material” can limit liability.
• Align your team: Coordinate disclosures with your attorney, accountant, and advisors.
• Negotiate fairly: Set realistic baskets, caps, and survival periods.
• Consider insurance: Representation and warranty insurance can help cover unexpected claims.
Final Thought
Representations and warranties shape both the economics and peace of mind in a sale. Understanding them—and working closely with experienced advisors—helps business owners protect their sale proceeds and ensure a smoother, lower-risk transaction.
