Representations and Warranties
Formal statements by the seller in the purchase and sale agreement about the state of the business — accuracy of financial statements, absence of hidden liabilities, validity of contracts. Their falsity exposes the seller to liability after closing.
Definition
Representations and warranties are written statements that the seller (and sometimes the buyer) includes in the purchase and sale agreement. They cover the actual state of the business at the time of the transaction: the financial statements accurately reflect reality, there are no undisclosed pending lawsuits, major contracts are valid, tax obligations are up to date, and so on.
In French-language Quebec documentation, you’ll see déclarations et garanties used for the same concept.
These clauses constitute a legal commitment. If a representation proves false after closing, the seller can be held liable for damages suffered by the buyer — which is why they have to be drafted with care and honesty.
Why representations and warranties matter in a business sale
For the seller, representations and warranties are both a protection and a risk. On the protective side, they precisely frame what you’re asserting about your business — anything not stated isn’t warranted. On the risk side, every statement commits you: if the buyer discovers after closing that a significant liability wasn’t disclosed, they can bring a claim against you.
That’s why purchase and sale agreements often include a holdback on the sale price — typically 10% to 20% — placed in escrow for 12 to 24 months. This amount acts as financial security in case of a breach of representation. In Quebec, the legal limitation period can extend beyond this window depending on the nature of the claim.
The best strategy for a seller is complete transparency. Proactively disclosing known issues — even minor irritants — lets you negotiate tailored clauses rather than expose yourself to surprise claims. A good broker will help you identify risk areas before the agreement is even drafted.
What every seller should know
- Read every representation carefully with your lawyer — you’re responsible for their accuracy, even if the buyer’s lawyer drafted them.
- Disclose any known issues in the disclosure schedules — what’s disclosed can’t be the basis for a claim.
- Negotiate liability caps and minimum thresholds (baskets) to limit your financial exposure after closing.
- Expect a holdback to be standard — the amount and duration are negotiable, but it’s rarely eliminated.