What are reps and warranties?
Representations and warranties — reps and warranties, or R&W — are the statements of fact a seller makes about the target in the purchase agreement. They cover the condition of the business as the seller asserts it to be: that the financials are accurate, that the contracts are valid, that there is no undisclosed litigation, that taxes have been paid, that the company owns its assets cleanly.
Their function is to allocate risk. Diligence reveals what a buyer can find; reps and warranties protect the buyer against what it could not. By signing them, the seller stands behind the truth of those statements, and if one turns out to be false, the buyer has a contractual claim — usually an indemnity — for the resulting loss.
Reps are typically qualified by the disclosure schedule, where the seller carves out the specific exceptions to its otherwise clean statements. A rep and its disclosures have to be read together to know what the seller has actually promised.
How reps and warranties work in a deal
R&W sit at the heart of the risk allocation between buyer and seller.
- The seller makes statements. The agreement lists representations across every dimension of the business — financial, legal, tax, operational.
- Disclosures qualify them. The seller lists exceptions on the disclosure schedule, so a rep is only breached if reality differs from the statement as disclosed.
- They survive for a period. Most reps survive for a defined window after close, during which the buyer can bring a claim.
- Breach triggers a remedy. If a rep is untrue and causes loss, the buyer's recourse is typically an indemnity, often capped and subject to a deductible, and increasingly covered by reps and warranties insurance.