Understanding Representations and Warranties in Business Sales.
What Are Representations and Warranties?
Representations are factual statements about the business’s current state. These cover areas such as financial accuracy, contracts in place, ownership of assets, legal compliance, and existing liabilities.
Warranties go a step further by promising that certain conditions will hold true for a specified period after the sale. For example, equipment may be warranted to remain in good working order, or key contracts may be guaranteed to stay valid for a defined time.
Together, representations and warranties protect both buyers and sellers by establishing expectations and remedies if those expectations are not met.
Why They Matter in Business Sales
When a buyer decides to invest in a business, they rely on the seller’s disclosures. Representations and warranties provide a structured way to quantify that trust. If a seller’s statements prove inaccurate, the buyer may pursue indemnification — compensation for losses resulting from those inaccuracies.
This protects buyers from unforeseen issues and gives sellers a clear framework for their financial responsibilities after closing.
Typical Areas Covered
Representations and warranties usually address key areas, such as:
Authorization to sell the business
Good standing with regulators
Accuracy of financial statements
Payment of taxes and absence of liens
No undisclosed litigation
Ownership and clear title to assets
Valid employee, vendor, and customer contracts
No environmental or compliance issues
Each of these tools balances risk between parties and prevents small errors from becoming major disputes.
Why Precise Language Matters
Careful wording in representations and warranties can significantly impact liability. For example, stating that equipment is “in good repair” implies a stronger guarantee than “in good repair to the best of the seller’s knowledge.” Small differences in phrasing can change financial outcomes post-closing.
Best Practices to Minimize Risk
Sellers can protect themselves by:
Providing audited, accurate financials
Fully disclosing all known issues
Working with experienced M&A attorneys and business brokers
Considering representations and warranties insurance
Including clear dispute resolution mechanisms
These steps not only reduce risk but also build confidence with potential buyers, making the sale process smoother and more successful.