Why does Representations and Warranties matter?
They are the mechanism by which risk not caught in diligence gets allocated after closing. A false rep discovered post-close typically gives the buyer a claim against escrow or the seller directly, so negotiating how broad the reps are, how long they survive after close, and what caps apply is really a negotiation over how much risk the seller keeps versus hands off to escrow or insurance.
What does Representations and Warranties look like in practice?
Suppose a purchase agreement includes a rep that "the company owns all its IP free and clear," and six months after close the buyer discovers a former contractor never signed an IP assignment. If that rep survives for 18 months post-close, the buyer has a claim against escrow to cover fixing the ownership gap, money the seller does not see even though the deal has long since closed.
What are the common mistakes with Representations and Warranties?
- Agreeing to reps the seller cannot actually stand behind, such as compliance claims in areas that were never audited, just to keep the deal moving.
- Not negotiating a cap on liability for breaches, leaving exposure open beyond the escrow amount for material claims.
- Letting the survival period run far longer than diligence would justify, keeping old, immaterial issues live as claims for years.
- Confusing reps and warranties (statements about past and present facts) with covenants (promises about future conduct). They are different obligations with different remedies.
Related concepts
- IndemnificationThe contractual obligation for one party in a deal, usually the seller, to compensate the other for losses caused by a breach of the agreement's representations, warranties, or covenants, discovered after closing.
- Escrow HoldbackA portion of the purchase price, typically 5 to 15 percent, withheld at closing and held by a third party for a set period to fund any indemnification claims the buyer later makes, rather than paid out to the seller immediately.
- Disclosure ScheduleA detailed set of exhibits attached to the purchase agreement that lists every specific exception to the reps and warranties (pending litigation, contracts requiring consent to assign, known liabilities) so the seller is not making a false statement by omission.
- Due Diligence Data RoomA secure, organized repository of a company's key documents (financials, contracts, cap table, IP filings, HR records) assembled for a buyer's or investor's legal, financial, and operational review before a financing or acquisition closes.