Representations and warranties
Representations and warranties are statements of fact a seller makes in the purchase agreement about the business — that the financial statements are accurate, that taxes are filed, that there is no undisclosed litigation. If one proves untrue, the buyer has a contractual claim, usually backed by an indemnity.
A buyer can never verify everything. Representations and warranties allocate the risk of what diligence did not find: the seller, who knows the business, stands behind a defined set of facts, and the buyer relies on them. They are the reason a purchase agreement runs to dozens of pages rather than one.
How they are limited
- A survival period — how long after closing a claim can be brought, often longer for tax and title
- A cap on total liability, frequently a percentage of the purchase price
- A basket or deductible, so small claims cannot be brought at all
- Knowledge and materiality qualifiers, narrowing what the seller is actually promising
- Disclosure schedules, which carve out specific known exceptions
Where the negotiation really happens
Not in the list of representations, which is fairly standard, but in the qualifiers and limits around them. A representation given "to the seller’s knowledge" is a much narrower promise than the same sentence without those words, and a cap set low enough can make a representation commercially meaningless.
Sources
This definition is checked against primary sources. Links were last confirmed on the dates shown.
- 01Canada Revenue AgencyGovernmentSelling a business
- 02Treadstone LawLegal commentaryBuying & Selling a Business
- 03Treadstone LawLegal commentaryEscrow and Holdbacks in an Ontario Business Sale
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