What Are Reps and Warranties?

Representations and warranties (‘reps and warranties’ or just ‘R&W’) are factual statements you make in the purchase agreement about the condition of your business. Things like: ‘the financial statements provided are accurate,’ ‘there are no undisclosed lawsuits,’ ‘all material contracts have been provided,’ ‘the company is in compliance with tax laws.’

If a rep turns out to be untrue post-closing — intentionally or not — the buyer has the right to indemnification (reimbursement) from the seller. The escrow at closing typically funds the first portion of any indemnification claims; beyond that, the seller may owe additional amounts up to the negotiated cap.

Reps and warranties typically take up 20–40 pages of the purchase agreement and are one of the most heavily negotiated sections of the document. They’re not just legal boilerplate — they’re the basis for your post-closing financial exposure.

Common Reps and Warranties

Standard reps typically cover the following categories:

• Financial statements: The provided financials are accurate, complete, and prepared in accordance with GAAP (or modified GAAP for small businesses).
• Tax matters: All required tax returns have been filed; all taxes have been paid; there are no undisclosed audits or disputes.
• Material contracts: All material customer, vendor, lease, and other contracts have been disclosed; no material breaches exist.
• Employees and benefits: Employee classifications are correct; benefit plans comply with law; no undisclosed employment disputes.
• Intellectual property: The company owns or has licensed all IP used in operations; no infringement claims.
• Litigation: No pending or threatened litigation other than what’s disclosed.
• Compliance with laws: The business is operating in compliance with applicable regulations (industry-specific, environmental, etc.).
• Customer and supplier relationships: No material customer or supplier has notified intent to terminate.
• Insurance: All material insurance policies are in force; no pending claims.
• Real property and assets: Title to assets is clean; no undisclosed liens.

Fundamental vs. General Reps

Not all reps are created equal. They typically split into two categories:

Fundamental reps

Cover the most basic facts: ownership of the equity being sold, organization of the company, authority to enter the transaction, tax matters, and a few others depending on the deal. These usually have a longer survival period (often 5–7 years or even indefinite) and a higher cap (often the full purchase price). Breaches are rare but expensive.

General reps

Cover the operational and financial condition of the business. Survival period is typically 12–24 months; cap is typically 10–15% of the purchase price (lower than fundamentals). Most breaches that surface post-closing relate to general reps.

Knowledge Qualifiers: ‘To Seller’s Knowledge’

Some reps are absolute: ‘the financial statements are accurate.’ Others are qualified by the seller’s knowledge: ‘to seller’s knowledge, there are no pending lawsuits.’

Sellers want knowledge qualifiers on as many reps as possible. They limit liability to things the seller actually knew about (or, depending on language, ‘should have known about’).

Buyers want absolute reps wherever possible. Absolute reps shift the risk of unknown problems to the seller.

The negotiation typically lands somewhere in between, with knowledge qualifiers on more subjective or uncertain matters (litigation, regulatory compliance) and absolute reps on objective matters (financial statements, list of contracts).

Rep & Warranty Insurance (RWI)

Rep & Warranty Insurance is an insurance product that covers losses from breach of reps and warranties. Increasingly common in deals above ~$15M enterprise value — especially in PE-led transactions where the seller is taking equity rollover.

How it works: a third-party insurer (Beazley, AIG, Liberty, Allied World, others) underwrites the deal and issues a policy. Either buyer or seller can be the named insured. Coverage typically equals 10–15% of the deal value (similar to a traditional escrow). The policy survives for 3–6 years depending on the rep category.

Cost is typically 2–4% of the coverage limit, plus underwriting fees ($25K–$75K). On a $50M deal with $7.5M coverage, premium might be $150K–$300K.

Why sellers like RWI: Reduces escrow size (often to ~1% of deal value instead of 10%), allowing more cash at close. Caps seller’s post-closing liability for most reps to ~$1M (the policy retention).

Why buyers like RWI: Reduces the risk of having to chase the seller for indemnification claims; provides a deeper pocket if losses are large.