The purchase agreement will have a section, usually a long one, where you make formal statements about your business. That the financials are accurate. That you own what you’re selling. That your taxes are paid. That there’s no lawsuit you haven’t mentioned. That you’ve complied with the laws that apply to you.
Those are the representations and warranties. They’re the mechanism by which you can still owe the buyer money a year after you’ve handed over the keys.
Most sellers skim this section because it reads like boilerplate. It isn’t. It’s the part of the deal most likely to come back.
What a rep actually does
A representation is a factual statement you’re making as of a specific date. If it’s wrong, the buyer generally has a claim — even if you didn’t know it was wrong, depending on how it’s written.
That last part surprises people. “I didn’t know” is sometimes a defense and sometimes not, and which one it is depends entirely on whether the rep has a knowledge qualifier in it. That’s a drafting question, and it’s negotiable.
Why buyers want so many of them
From the buyer’s side, reps do two jobs.
The first is risk allocation. The buyer can’t verify everything in diligence. Reps shift the risk of the unverifiable back to the person who actually knows the business — you.
The second is smoke detection. When a buyer’s lawyer asks you to represent that there are no employee classification issues and you hesitate, they’ve learned something. Reps are a diligence tool as much as a legal one.
The disclosure schedule is your friend
Here’s the thing sellers most often miss.
You don’t have to make a rep that’s flatly true. You make the rep, and then you attach a schedule listing the exceptions. “There is no pending litigation” becomes “There is no pending litigation except as set forth in Schedule 3.12” — and Schedule 3.12 lists the small claims matter with the vendor.
Once it’s on the schedule, the buyer has been told. They can price it, ask for an indemnity, or walk. What they can’t do is come back after closing and say they didn’t know.
The disclosure schedule is the single best protection a seller has, and it works only if you’re thorough. Every “except as disclosed” you earn is a claim that can’t be brought later. Treat schedule preparation as real work, not a paperwork chore at the end — this is where your money is actually protected.
The reps that trip sellers up
Financial statements. You’re usually representing that they’re accurate and prepared consistently. If your books have quirks — personal expenses run through the business, revenue recognized on a schedule your accountant would raise an eyebrow at — this rep is where that becomes a legal problem instead of an accounting one.
Taxes. All returns filed, all taxes paid. Sales tax is a frequent trouble spot for small businesses, and so is anything involving employees in more than one state.
Employees and contractors. Everyone properly classified, wages paid correctly, no pending claims. If you have long-term contractors doing employee-shaped work, disclose it. This is one of the most common post-closing claims in small business deals.
Contracts. Each material contract is valid, in full force, no defaults, and — importantly — no consent needed to assign it that hasn’t been obtained. Read this one against your actual contracts.
Compliance with law and licenses. Broad by design. Every permit and license current and in good standing.
No undisclosed liabilities. A catch-all. Anything the business owes that isn’t on the financials or a schedule.
Condition of assets. What you’re selling works and you own it free of liens.
Customers and suppliers. Often includes a rep that no major customer has told you they intend to leave. If a big account has hinted at not renewing, that belongs on a schedule, uncomfortable as that conversation is.
The three dials that decide your real exposure
Signing reps doesn’t tell you what you’re risking. These three terms do.
Survival period. How long after closing the buyer can bring a claim. Twelve to twenty-four months is common for general reps; certain “fundamental” reps — ownership, authority, taxes — often survive longer, sometimes for the statutory period. The length is negotiable, and shorter is better for you.
Cap. The most you can owe. Often a percentage of the purchase price rather than all of it. Fundamental reps and fraud are usually carved out of the cap, and that carve-out is standard.
Basket or deductible. A floor, so small claims can’t be brought at all. Two flavors matter: a true deductible (the buyer recovers only above the threshold) and a tipping basket (once the threshold is crossed, the buyer recovers everything from dollar one). The difference between those two is real money, and it’s one line of drafting.
Also watch the escrow or holdback — a portion of the purchase price, often 5% to 15%, parked with a third party to satisfy claims. What matters is the amount, how long it sits, and what triggers release.
What about reps and warranties insurance?
You may hear about it. It’s a policy that covers rep breaches so the seller’s exposure shrinks and the escrow can be smaller. It’s common in larger transactions and increasingly available further down market, but it isn’t standard for most small business sales and it comes with its own diligence requirements and cost. Worth asking about; not worth assuming.
The one thing that is never negotiable
You cannot disclose your way out of fraud, and no cap protects it. If you knowingly hide something material, the deal documents won’t save you. Disclose it. A disclosed problem is a negotiation; a hidden one is a different kind of case entirely.
The pattern we see most
A seller signs a purchase agreement with a standard set of reps and a 15% escrow held for eighteen months. Nine months after closing, the state opens a sales tax inquiry covering periods the seller ran. The buyer makes a claim against the escrow.
The seller knew the sales tax treatment had been sloppy. It never came up, because nobody asked directly and it wasn’t on any schedule. Had it been listed, the parties would have negotiated it — probably a specific indemnity or a price adjustment, both known and bounded. Instead it became a claim, with the seller’s money already sitting in someone else’s account.
The disclosure would have been awkward for an afternoon. The claim was expensive for a year.
What to do next
If you’re heading into a purchase agreement, the reps section and the disclosure schedules deserve as much attention as the price. They decide how much of the price you actually keep.
Holmes Business Law represents sellers and buyers across Pennsylvania and New Jersey — purchase agreements, disclosure schedules, indemnification terms, escrow, and the rest of the deal documents. We coordinate with your CPA on tax and accounting questions.
