Representations and Warranties

A purchase agreement contains dozens of reps. 'Fundamental reps' go to the core of the deal — that the seller has valid title to the shares/assets, due authorization to sell, and proper capitalization — and are heavily protected. 'Business reps' cover everything else: that the financial statements are accurate and prepared under GAAP, there's no undisclosed litigation, taxes are paid and filed, material contracts are in force, the company complies with applicable law, owns its IP, and has no undisclosed liabilities. Reps are 'made' as of signing and 'brought down' (reaffirmed) as of closing, and their accuracy at close is usually a condition to the buyer's obligation to complete the deal.

A breached rep gives rise to an indemnification claim, but several mechanics limit exposure. Survival periods define how long after closing a rep can be claimed against (often 12–24 months for business reps, much longer or indefinite for fundamental and tax reps). A basket (deductible) sets a threshold of losses the buyer must absorb before claiming — like an insurance deductible — and a 'tipping basket' vs. 'true deductible' determines whether the buyer recovers from dollar one or only above the threshold. A cap limits the seller's maximum indemnification, frequently 10–20% of purchase price for business reps but up to the full purchase price for fundamental reps. An escrow or holdback (commonly ~10% of price) funds claims. Knowledge qualifiers ('to the seller's knowledge') and materiality qualifiers further narrow what counts as a breach.

In most middle-market and PE deals today, the buyer purchases representations and warranties insurance, which shifts breach risk from the seller to an insurer in exchange for a premium (typically ~2.5–4% of coverage limits). This lets sellers — especially PE funds wanting a clean exit — achieve a low or 'no-indemnity' deal and walk away with sale proceeds rather than tying up cash in escrow. The flip side of the reps is the disclosure schedules: the seller lists exceptions to each rep (e.g., 'except for the lawsuit listed in Schedule 3.12'). Anything properly disclosed is carved out of the rep, so disclosure is the seller's main tool to avoid future breach claims.