Representations and warranties (reps and warranties) are statements of fact made by each party in a business purchase agreement, upon which the other party is relying. Understanding what you are representing — and what the other party is promising you — is essential before signing any business sale agreement.
Seller Representations
Sellers typically represent: that the financial statements provided are accurate and complete, that no material adverse changes have occurred in the business since the most recent financial statements, that all disclosed contracts are valid and in effect, that the business is in compliance with applicable laws and regulations, that the seller has full authority to sell the business, and that there are no undisclosed litigation, liens, or environmental issues.
Buyer Representations
Buyers typically represent: that they have the financial capability to complete the transaction, that they have conducted their own due diligence and are not relying solely on the seller's representations, and that their financing is in order. Buyer representations are generally narrower than seller representations.
Post-closing claims for breach of representations and warranties are a real risk in business transactions. Sellers should review every representation carefully before signing — a misrepresentation, even unintentional, can result in post-closing indemnification obligations. Buyers should understand the indemnification provisions that protect them if representations prove false, including survival periods and claim thresholds.