Imagine you’re about to buy a house. The seller tells you the roof is in great shape, there’s no mold, and all the permits are in order. You close the deal, move in, and discover the roof leaks like a sieve, black mold is thriving behind the walls, and that gorgeous deck was built without permits.
You’d be furious, right? You’d want recourse. Little-known fact: this was the inciting incident originally planned for the John Wick franchise. (Bigger known fact, that’s not true.)
That’s exactly what representations and warranties do in mergers and acquisitions. These turn the seller’s promises into legally enforceable commitments, allowing recourse if they’re breached. They’re your insurance policy against discovering you bought something very different from what you thought you were getting.
What Are Representations and Warranties, Really?
In plain English, representations and warranties are a tag team working together to provide statements of fact from one party to another in a deal. Think of them as the seller saying, “Here’s what’s true about this business, and I’m putting it in writing so you can hold me to it.”
Representations are statements about past and present facts. “We own all our equipment outright.” “We have 47 employees.” “We’re not involved in any lawsuits.”
Warranties are promises that certain facts are true and will remain true for a specified period, with consequences if they’re not.
Together, these mean that when a seller makes these statements in the purchase agreement, they’re not just sharing information—they’re creating legal liability if those statements turn out to be false.
Why Do Representations and Warranties Matter So Much?
Here’s the thing about buying a business: you’re making one of the biggest financial decisions of your life based on information the seller controls. You can do all the due diligence in the world, but you’re still dependent on what the seller tells you and shows you.
Reps and warranties level the playing field in three critical ways:
They Force Honesty
When a seller knows they’ll be on the hook financially if something they say is untrue, they become remarkably more careful about what they claim. It’s the difference between casually saying “yeah, we’re doing great” and signing a legal document that says “our financial statements are accurate and complete.”
They Provide a Remedy
If you discover after closing that the seller lied or was mistaken about something material, you have legal recourse. Depending on how the deal is structured, you might get money back from an escrow account, reduce future payments, or even sue for damages. Without reps and warranties, you’d be stuck with whatever you bought, flaws and all.
They Allocate Risk
Every business has some level of uncertainty. Reps and warranties determine who bears the risk for specific issues. If the seller represents that all tax returns have been filed and paid, and it turns out there’s an unpaid tax bill, that’s the seller’s problem to fix, not yours.
The Due Diligence Connection: Detective Work That Drives Your Deal Terms
Due diligence is where you put on your detective hat and investigate the business you’re buying. You’re requesting documents, asking questions, interviewing key people, and generally trying to uncover any skeletons in the closet.
Here’s how due diligence and reps and warranties work together like a perfect dance:
Due Diligence Reveals What You Need to Ask About
You start with broad document requests: financial statements, contracts, employee lists, intellectual property registrations, and litigation history. As you review what comes back, you start noticing things.
Maybe you see an insurance claim from two years ago. Or a contract that’s about to expire, a contract that’s about to expire, an employee agreement that looks unusual, or revenue from one customer that represents 60% of total sales.
Each of these discoveries tells you what representations you need to demand. That insurance claim? Now you want a rep about all insurance claims in the past five years. That big customer? You need a rep to ensure that the customer relationship is solid and the contract is in full force.
Due Diligence Helps You Craft Specific Reps
This is a big one. The best reps and warranties aren’t generic. Instead, they’re tailored to address exactly what you found (or didn’t find) during due diligence.
Let’s say during due diligence, the seller tells you about a dispute with a former employee but insists it’s been settled. Great. Now you want a specific rep that says: “The company has no disputes with any former employees except for the dispute with John Smith, which was fully resolved pursuant to a settlement agreement dated January 15, 2024, and no further amounts are owed under that settlement.”
See how specific that is? You’ve turned a vague claim into a detailed, enforceable statement.
Due Diligence Uncovers What Needs Extra Protection
Sometimes, due diligence reveals a red flag that makes you nervous but doesn’t kill the deal. Maybe you discover the company has been late paying some vendors. Or there’s a pending regulatory inspection. Or the lease on the main facility is up for renewal in six months.
These discoveries become the basis for very specific reps and warranties—and often special provisions like escrows, indemnities, or even purchase price adjustments. You’re essentially saying, “I see this risk, and I want you on the hook if it blows up.”
Representations & Warranties Are Critical
Representations and warranties transform the seller’s sales pitch into legally binding promises. They’re the mechanism that makes sure what you see during due diligence is actually what you get after closing.
Good reps and warranties don’t kill deals. They make deals possible by allocating risk fairly and giving both sides confidence that they’re protected against the unknown.
The key is doing the detective work in due diligence to know what questions to ask, then demanding reps that turn the answers into enforceable commitments. Generic reps provide baseline protection. Specific, tailored reps based on your due diligence findings, that’s where the real protection lives. Stay tuned for next month’s blog, where I’ll walk you through common representations & warranties
When you’re ready to buy or sell a business, the team at Way Law is ready to help! A great lawyer doesn’t merely hand you a contract. We talk with you about what’s important to you, what your goals are, and what risks you need to avoid. Then we take the lead on designing the due diligence process to find out what you need to know about this company.
Because the best deals aren’t the ones where someone wins, and someone loses. They’re the ones where everyone walks away confident they made the right move. Let’s build your deal! Team Way Law has you covered!