Meaning
Contractual statements of fact describe the condition and history of a business. These representation and warranties form the basis of the buyer’s risk assessment and insurance coverage. If any statement is later found to be false, the seller may be liable for damages or a reduction in the payout.
Risk Allocation
Financial liability is shifted from the buyer to the seller through these clauses. In the context of representation and warranties, the seller asserts that the taxes are paid and the intellectual property is owned. This structure protects the buyer from unknown issues that existed before the closing date.
Disclosure Schedule
Exceptions to the broad claims are listed in a separate document to prevent a breach of contract. Using representation and warranties effectively requires the seller to disclose every known flaw or pending lawsuit. A failure to list an exception can result in a claim against the escrow funds.
Survival Period
Liability for these statements continues for a specified time after the sale is complete. Most representation and warranties expire after eighteen to twenty-four months, but tax and environmental claims can last longer. The end of this period marks the point when the founder can finally consider the transaction closed and the risk of a clawback removed.
This duration is a point of heavy negotiation in most purchase agreements.
