Representations and warranties are the factual statements a seller makes in the purchase agreement, that financials are accurate, taxes are paid, contracts are valid, and no undisclosed liabilities exist. If they prove false, the buyer can seek indemnification.
Worked example
| Representation | If it's false… |
|---|---|
| "All taxes are filed and paid" | Buyer claims indemnity for the shortfall |
| "Financials are accurate" | Purchase price / earnout may adjust |
| "No pending litigation" | Seller covers resulting losses |
| "Assets are free of liens" | Seller must clear or reimburse |
If the "taxes are paid" warranty is breached by a surprise $30,000 bill, indemnification makes you whole.
Why it matters when buying a business
Reps and warranties are your legal safety net where due diligence ends, you can't verify everything, so the seller stands behind it. Their teeth come from the indemnification clause and any escrow holdback. Broad, well-drafted reps in the asset purchase agreement are one of a buyer's strongest protections.
