Representations and Warranties

What Reps and Warranties Cover

A standard SMB purchase agreement includes representations from both seller and buyer. The seller's reps typically cover:

Financial reps — financial statements are accurate and prepared consistently; no undisclosed liabilities; accounts receivable are collectible; inventory is accurately stated

Legal and compliance reps — no pending or threatened litigation; business is in compliance with applicable laws; all required licenses and permits are current

Tax reps — all taxes have been filed and paid; no pending audits or assessments

Employment reps — accurate disclosure of employee agreements, benefit obligations, and classification practices

Material contract reps — all material contracts disclosed; no defaults; contracts are assignable (in asset sales)

Intellectual property reps — the business owns or has rights to all IP used in operations; no infringement claims

Survival Periods

Reps and warranties don't survive forever. The purchase agreement specifies how long the seller is on the hook for each category:

• General reps: 12-24 months post-close (most common)
• Fundamental reps (title, authority, capitalization): often survive indefinitely or 5-6 years
• Tax reps: typically survive until the relevant statute of limitations
• Fraud: survives indefinitely

The Indemnification Backstop

A rep breach doesn't automatically pay out. The buyer must demonstrate a breach, quantify damages, and either: (1) negotiate a settlement with the seller, or (2) pursue litigation. This requires the seller to have accessible assets and the willingness to engage — neither is guaranteed post-close.

Representations and warranties insurance (RWI) replaces seller indemnification with an insurance policy, allowing buyers to make claims against an insurer rather than pursuing the seller directly. Once limited to large M&A deals, RWI is now available on transactions as small as $5-10M.