Regardless of the structure, size, and terms of a business acquisition, the sales contract will contain several reps and warranty's providing both parties with a clear understanding of the specific commitments being made in the transaction.  Representations and warranties are important components of the agreement involving significant negotiation between each of the party's.  The involvement of a business lawyer with experience in preparing business purchase agreements is strongly recommended.  Both the buyer and seller should prepare in advance and determine which specific representations and warranties that are required to close the deal.  This advance preparation will assist in mitigating delays, reducing expenses, and eliminating surprises.

Common definitions for representations and warranties include:

Representation:

A representation is "A presentation of fact -- either by words or by conduct -- made to induce someone to act, especially to enter into a contract", as defined by Black's Law Dictionary.  Seller's typically make representations involving a variety of legal, financial, and operational matters (both from the past and present) related to the business. Buyer's make representations as well.  Typically these pertain to financing commitments either regarding loan approvals or cash deposits at closing. There can be occasions that a "knowledge" qualifier will be present where one party could only be held liable, should a breach incur, if it was determined that prior knowledge of a false statement was involved.

Warranty:

A described, a representation is known as a statement of fact in either the past or present.  A warranty differs as it generally extends beyond the purchase agreement and is defined as a promise of action extending into the future. 

Most professionals now use representations and warranties in tandem when formalizing purchase and sale agreements.  A combination of these words in an agreement will blend the past, present, and future together.  Therefore, buyers and sellers will "represent and warrant" a number of statements, both from the past and present, without indicating which relates to a specific representation or warranty.

Several important purposes are served by representations and warranties, including:

• Establishes the framework for a party's indemnification obligations prior to the deal closing. 
• Confirmation of specific company data that was not available through due diligence.
• Establishes a basis for either delaying a closing or a terminating the deal if inconsistent or false information is revealed before closing.

Some of the more common "boiler plate" representations and warranties contained in small business transaction agreements include:

• Valid & Binding - Corporate resolution and/or other internal approvals for the business sale –owners, board of directors, shareholders – have been properly authorized.
• Business Financial Statements – Confirmation that the financial statements provided to the buyer are complete & accurate in all material aspects.
• Assets & Liabilities – Complete listing of what assets are included in the acquisition and assurance that the seller has good, valid, and marketable title. In addition, a complete listing of the exact liabilities the buyer is assuming and assurance that there are no undisclosed liabilities or obligations (typically for stock sales).
• Corporate Structure/Organization – Company was properly established and has the required licenses and authority to operate.
• Business Taxes – Lists any tax liabilities and assures the buyer that all tax obligations have either been paid or properly reserved for.
• Environmental – Confirmation that the seller is in compliance with all environmental laws and regulations.  Disclosure of any issues the company has had in the past, e.g. hazardous materials.  (This is pertinent when real property is involved.)
• Compliance with Laws & Litigation – Company is not in violation of any local, state, or federal law. Additionally, there is no threatened or pending litigation.
• Employee Benefits – Lists any human resource issues pertaining to employment laws, potential litigation, or unfunded pension liabilities.
• Contracts – List of the material agreements and contracts with manufacturers, suppliers, or clients and certifies that they are valid & enforceable.  Confirmation that the seller is not in breach of any of them.

Note:  This article does not constitute legal advice.  It is strongly advised that clients seek independent legal advice from licensed attorneys who possess an expertise in business transactions.