Reps & Warranties
Buy a BusinessRepresentations and warranties (“reps & warranties”) are the seller’s formal written statements in a purchase agreement about the condition of what you’re buying: that the financials are accurate, there are no undisclosed debts or lawsuits, taxes are paid, contracts are valid, and title is clean. They exist to allocate the risk of the unknown — the things due diligence might miss.
Why they matter. Due diligence can only find what you look for. Reps & warranties cover the rest: if the seller swore the books were accurate and you later discover they weren’t, the false rep is your legal hook to recover. The remedy is usually an indemnity (the seller owes you back) or, far more enforceable for a small deal, an offset — the right to reduce what you still owe on a seller-financed note.
A rep & warranty is only as strong as your ability to collect on it. Chasing an individual seller through a lawsuit is slow and often fruitless. That’s why the single best protection on a small acquisition is a large seller note with an offset clause — you simply stop paying to cover the loss. See how this saved (or would have saved) real buyers in first-time buyer traps.
Reps are negotiated in the LOI and tested by quality-of-earnings due diligence.