A rep or warranty is a legal promise about your business. When you sell your business, you make a bunch of these promises to the buyer. They’re in the purchase agreement as “representations and warranties,” and they’re important because if you break them, you can be held liable.

Here’s an example: you warrant that “the business owns or has valid licenses for all intellectual property used in operations.” If it turns out after closing that you didn’t actually own something you said you did, you’ve breached that warranty, and the buyer can claim damages against you.

Reps and warranties exist because a buyer can’t know everything about your business, and they need some legal guarantees about what they’re buying. They’re also a way for a buyer to recoup losses if they discover something was materially different from what you represented.

What’s Typically Represented

Purchase agreements usually have reps and warranties covering:

Ownership — You own the business and have the right to sell it. There are no outstanding claims against you for the business.

Financial statements — The financial statements you provided are accurate, complete, and fairly presented. There are no undisclosed liabilities.

Contracts — All material contracts are listed. You’ve disclosed any contract that the buyer should know about. No major contracts will terminate as a result of the sale.

Customers — The customer list is accurate. You haven’t overstated customer relationships or revenue sources.

Employees — You’ve disclosed all employees, their compensation, and any employment agreements. There are no pending employment disputes.

Compliance — The business complies with all applicable laws and regulations. You’ve disclosed any regulatory issues.

Intellectual property — The business owns or has rights to all intellectual property it uses. There are no IP disputes or infringement claims pending.

Liabilities and litigation — You’ve disclosed all known liabilities, lawsuits, claims, or threats. Nothing material is hidden.

Environmental compliance — For relevant businesses, you’ve disclosed environmental compliance status.

Tax compliance — Tax returns are accurate and all taxes are paid. There are no pending tax disputes.

These are pretty broad. Essentially, you’re warrantying that your business is what you’ve said it is, nothing material is hidden, and all major risks are disclosed.

The Survival Period

Here’s a critical element: reps and warranties don’t last forever. They have a “survival period”—a time limit for how long the buyer can bring a claim.

Common survival periods:

  • 12 months for general reps and warranties
  • 18-24 months for financial and tax reps
  • 36+ months for indemnification (big liability insurance claims)

This means if the buyer discovers a breach of warranty within the survival period, they can claim against you. After the survival period expires, the reps and warranties expire and you’re no longer liable.

Why does this matter? If your survival period is 12 months and a customer relationship deteriorates after month 13, you’re protected—the buyer can’t claim you misrepresented the customer relationship.

Limiting Your Exposure

When the buyer’s attorney presents reps and warranties, they’re usually aggressive. They include detailed promises about everything, broad liability, and long survival periods. You should negotiate to limit your exposure:

Narrow the definitions. Instead of “the business is in compliance with all laws,” maybe “the business has disclosed all material environmental violations.” More specific is better for you because it reduces your exposure.

Add materiality thresholds. “Material” means above a certain dollar amount. You might agree to reps and warranties but only if breaches exceed $25,000 or 1% of EBITDA. Small claims don’t matter.

Shorten survival periods. Push for 12 months instead of 18, or 18 instead of 24. The sooner the reps expire, the sooner you’re protected.

Cap your liability. Some agreements cap total liability for breach of warranty. “Seller’s total liability for breach of representations and warranties is capped at the escrow amount.” Without a cap, you could be liable for more than the escrow.

Reduce scope. Some reps are particularly risky. “The business is in compliance with all laws” is broad and risky. “The business has disclosed all material lawsuits” is narrower. Push for narrower language on risky reps.

Add knowledge qualifiers. “To the seller’s knowledge” narrows the rep. You’re not promising things you couldn’t possibly know about. This is common in larger deals.

Common Disputes

Reps and warranties disputes usually involve:

Financial accuracy — Buyer claims revenue or profit was overstated. This often comes up if customers left or revenue declined after closing.

Customer relationships — Buyer claims a customer you said was committed actually left. You warranted the customer relationship, buyer claims breach.

Undisclosed liabilities — An invoice, contract, or claim shows up that you didn’t disclose.

Regulatory compliance — A compliance issue surfaces that wasn’t disclosed.

IP ownership — A third party claims they own IP that you said the business owned.

These disputes are why your disclosures and representations need to be honest and accurate. If you’ve genuinely represented something false, you’re liable. If you’ve been honest, you have a defense.

Preparing for Reps & Warranties

The best defense is transparency. Disclose everything material. If there’s a potential issue, disclose it upfront. “We had a customer concentration risk—our top three customers were 50% of revenue”—that’s much better than the buyer discovering it after closing and claiming breach.

Have your attorney review the reps and warranties schedule carefully. Make sure you understand what you’re promising. Challenge reps that are too broad or unrealistic. “The business is in compliance with all laws” is almost impossible to warrant absolutely. “The business is in compliance with all material laws that the seller knows about” is better.

Reps and warranties are negotiable. Don’t just accept the buyer’s draft. Work with your attorney to push back, narrow language, shorten survival periods, and cap liability. These are standard negotiation items.

Remember: a rep and warranty is a promise you’re making after the sale closes. If you break it, the buyer can sue you or claim against escrow. Make sure you only promise things you can back up with documentation and confidence. The more honest and transparent you are upfront, the fewer warranty disputes you’ll face later.