Reps and Warranties: The Statements That Can Unwind a Deal After Closing

Statements and disclosures one party makes to another in a purchase agreement. They give the other party a basis to cancel the deal or bring an indemnification claim if the statements turn out to be false. Representations address the past and present; warranties cover past, present, and future; covenants are mainly forward-looking promises.

Why it matters: In a business sale, this mostly concerns what the seller asserts about the current and expected state of the business. Some purchase agreements have the buyer explicitly accept that no reps or warranties are being made at all — worth noticing if you see that language. For a seller, this is the part of the purchase agreement with the longest tail of risk — reps and warranties can create exposure that survives closing by months or years, meaning the deal isn't fully "done" just because the wire hit your account.

Sellers should read this section as carefully as the price and payment terms, since an overly broad or loosely worded representation about, say, the condition of equipment or the status of contracts can become the basis for a post-closing claim the seller never anticipated. Representation and Warranty Insurance, usually bought by the buyer, can cover losses if the seller's reps and warranties turn out to be wrong, and can reduce or eliminate the need for a seller escrow.

Example (illustrative only): A purchase agreement includes a seller representation that "all material contracts are in full force and disclosed in Schedule X." After closing, the buyer discovers an equipment lease that wasn't disclosed and carries an early-termination penalty. Because the representation was inaccurate, the buyer may have grounds for an indemnification claim against the seller — which is exactly the scenario reps and warranties are designed to address, and exactly why sellers should double- and triple-check every schedule before signing rather than treating it as boilerplate.

Related terms: Purchase Agreement, Indemnity, Due Diligence, M&A Attorney