Acquisitions

Representations and Warranties

The promises a seller makes about the business — and the four numbers that decide whether a broken promise costs them anything at all.

  • Advanced
  • 9 min total
  • 12 chapters

What decision this helps you make: How much protection you actually hold when something you were told turns out to be false, and what to negotiate to change it.

What this topic is

Representations and warranties are the section of a purchase agreement where the seller states facts about the business — the financials are accurate, the taxes are filed, no customer has given notice, the equipment works — and promises to pay if a statement turns out to be wrong. The exceptions are listed in disclosure schedules; the payment machinery is called indemnification.

Why it matters

Diligence finds the problems you can see. Representations and warranties allocate the problems nobody could see. Whether an undisclosed tax bill, lawsuit, or lost contract becomes the seller's cost or yours is decided by four numbers — the cap, the basket, the survival period, and the escrow — plus a handful of small words like "material" and "to Seller's knowledge."

Who should learn it

Buyers and sellers of private companies, and anyone who will read a purchase agreement and needs to know which paragraphs are risk transfer and which are decoration.

What you will understand

  • What a representation is, what a warranty adds, and what disclosure schedules do
  • How caps, baskets, survival periods, and escrows decide real recovery
  • What knowledge and materiality qualifiers quietly hand back to the seller
  • Why collectability, not the cap, is often the binding constraint

Prerequisites

Common misconception

"We negotiated a 10% indemnity cap, so we are covered for 10% of the price." Rarely. Recovery is the smallest of several things at once: the cap, what is left in escrow, what survives on the day you discover the problem, what clears the basket, and what the seller can actually pay after they have spent the money. A generous cap against a seller who has emigrated with the proceeds is a number on a page.