{"id":4654,"date":"2016-04-04T10:47:37","date_gmt":"2016-04-04T15:47:37","guid":{"rendered":"https:\/\/content.findlaw-admin.com\/ability-law\/smallbusiness\/closing-a-business\/sample-representations-and-warranties.html"},"modified":"2024-05-23T00:56:49","modified_gmt":"2024-05-23T05:56:49","slug":"sample-representations-and-warranties","status":"publish","type":"page","link":"https:\/\/www.findlaw.com\/smallbusiness\/closing-a-business\/sample-representations-and-warranties.html","title":{"rendered":"Sample Representations and Warranties"},"content":{"rendered":"\n
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Sample Representations and Warranties<\/h1>\n
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\n By Susan Buckner, J.D.<\/a> | Legally reviewed by Susan Mills Richmond, Esq.<\/a>\n | Last updated\n
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This article has been written and reviewed for legal accuracy, clarity, and style by FindLaw\u2019s team of legal writers and attorneys<\/a> and in accordance with our editorial standards<\/a>.<\/em><\/p>\n\n <\/div>\n <\/details>\n\n

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The last updated date refers to the last time this article was reviewed by FindLaw or one of our contributing authors<\/a>. We make every effort to keep our articles updated. For information regarding a specific legal issue affecting you, please contact an attorney in your area<\/a>.<\/em><\/p>\n\n <\/div>\n <\/details>\n<\/section>\n

Buying and selling a small business<\/a> is no different than any commercial sale. The seller must provide the buyer with a statement of value about the company. The buyer or their agents must conduct due diligence<\/a> to verify all claims about the company before the sale. Then, the parties can begin negotiations.<\/p>\r\n

Representations and warranties often get litigated after a purchase or merger. Any failure to disclose a fact or an error in the wording of the representation and warranty can lead to legal action.<\/p>\r\n

Whether you are the buyer or seller, you must carefully negotiate your representations and warranties. This article discusses representations and warranties and offers sample language for your purchase agreement.<\/p>\r\n

What Are Representations and Warranties?<\/h2>\r\n

During negotiations for the purchase agreement, the parties discuss representations and warranties ("reps and warranties"). These phrases usually appear together in an agreement. Both parties must give representations and warranties, although the seller will give more than the buyer.<\/p>\r\n

A representation is a statement of fact that is true to the best of the maker’s knowledge on the effective date of the representation. For instance, "Seller represents that Seller has the authority to transfer this company."<\/p>\r\n

A warranty gives the buyer indemnification<\/a> if the representation is false. If the seller doesn’t have the authority to transfer the company, the buyer can sue the seller and the company at the company’s expense.<\/p>\r\n

Representations and warranties "survive" the closing date. That is, the clauses continue to have full force and effect post-closing. It’s in the seller’s best interests that all representations be accurate so the buyer does not need to litigate once the sale is complete.<\/p>\r\n

The seller can also ask for representations and warranties from the buyer. Buyer representations are typically about authority to buy and having enough capital.<\/p>\r\n

Baskets, Caps, and Qualifiers<\/h2>\r\n

Since representations and warranties require the seller to guarantee knowledge of all facts about the sale, most purchase agreements limit the amount or duration of "knowledge." This prevents the seller from being responsible for things they may not be aware of and keeps the total indemnity below a set amount.<\/p>\r\n

Knowledge qualifiers<\/b> depend on the seller’s specific knowledge of the representation made. A knowledge qualifier may include a definition of "knowledge" in the contract.<\/p>\r\n

Sample language: "To the best of seller’s knowledge," "To seller’s actual knowledge," "To seller’s knowledge at the time of this agreement."<\/i><\/p>\r\n

Survival periods<\/b> limit the duration of clauses in the agreement. Representations are time-limited. For instance, representations about intellectual property typically last about 36 months. Tax compliance knowledge may last twice as long because the seller should know if the company has paid its taxes.<\/p>\r\n

Sample language: "Representations and warranties made by Seller shall survive 18 months past closing, except [exceptions or exclusions]."<\/i><\/p>\r\n

Baskets,<\/b> or minimums, are the number of claims a buyer must accept before indemnification. Like an insurance deductible, baskets protect the seller by forcing the buyer to bear some disputes’ costs.<\/p>\r\n

Sample language: "Seller will not be liable to Buyer until the total amount of damages exceeds [percentage of purchase price] or [dollar amount], whichever is greater."<\/i><\/p>\r\n

"Seller will not indemnify Buyer until all damages exceed [dollar amount]. Seller is liable only for damages under [Section X] or that occurred prior to [date]. Seller is not liable for any breach or damages under [Section Y] or that occurred after [date]."<\/i><\/p>\r\n

Caps<\/b> set a maximum dollar amount for seller liability. Once the value of claims reaches the cap, the seller is no longer liable to the buyer.<\/p>\r\n

Sample language: "The total amount of damages Buyer may recover in any action arising from or in connection to a breach of these representations and warranties shall not exceed [dollar amount]."<\/i><\/p>\r\n

Disclosures and Exceptions<\/h2>\r\n

The seller must attach a disclosure schedule to the purchase agreement. It may also be part of the agreement itself. The disclosure schedule contains all the seller’s representations and any exceptions and exclusions.<\/p>\r\n

Disclosure schedules follow the purchase agreement. Sellers should begin work on the disclosure schedule and update it during negotiations. It will include such items as:<\/p>\r\n