Owners tend to read a purchase agreement for the price and the payment terms, then hand the rest to counsel. The rest is where most of the pages are, and a large share of them are promises. Before you sign, you will state dozens of facts about your company, and the buyer will pay you partly on the strength of them. If one of those statements turns out to be wrong after closing, part of the price can come back. The headline number is only final to the extent those promises hold.
1. Representations are facts you stand behind after closing
Representations and warranties are statements about the business as of signing and closing: the financial statements are accurate, taxes have been filed and paid, the material contracts are as described, there is no pending litigation beyond what is listed, the company owns or has the right to use its assets, and it complies with the laws that govern it. The buyer drafts them broadly, because every one is a form of protection for them. None of this is a sign of bad faith. A buyer cannot verify everything in diligence, so they ask you to stand behind what they could not check.
2. The disclosure schedule is the seller's real protection
Every representation can be qualified by a disclosure schedule, the list of exceptions attached to the agreement. The contracts rep says there are no defaults "except as set out in Schedule 4." The litigation rep says there are no claims "except as listed." Anything properly disclosed there is, in general, no longer something the buyer can claim against you later. That makes the schedule the most valuable document a seller prepares. The owner who lists the customer dispute, the expired permit and the handshake arrangement with a supplier is protected. The owner who leaves them out to keep the deal clean has turned an ordinary issue into a potential claim.
3. A few qualifying words change the size of the promise
Two short phrases do a great deal of work. A knowledge qualifier limits a representation to what you actually know: "to the seller's knowledge, no customer intends to terminate" is a very different promise from "no customer intends to terminate." A materiality qualifier limits it to problems that matter: "no material litigation" rather than "no litigation." Buyers resist both; sellers ask for both. Agree, too, on whose knowledge counts, usually a short list of named people, so the promise does not stretch to cover everything any employee ever heard.
4. Indemnification has limits, and the limits are negotiated
If a representation proves false, the indemnification section decides what the buyer can recover, and it usually contains three limits. A basket sets a threshold that losses must exceed before any claim can be made, so small problems do not turn into disputes. A cap sets the most you can owe for ordinary representations, often a fraction of the price rather than all of it, with escrow or a holdback as the first source of payment. A survival period sets how long claims can be brought, commonly a year or two for general representations. Certain fundamental representations, such as ownership of the shares and authority to sell, and tax matters, usually survive longer and carry higher caps. Fraud is generally excluded from every limit.
5. Preparation sets the exposure before the negotiation starts
The best protection is not a clever clause; it is a business with fewer surprises in it. Clean, reconciled financial statements, current tax filings, signed copies of key contracts, resolved disputes and assets titled in the company's name all make the representations easier to give and less likely to be breached. A review of your own records before going to market turns problems into disclosures instead of claims. On larger transactions, representations and warranties insurance can shift some of this risk to an insurer, at a premium, but the insurer will also want to see a well-run diligence process.
The takeaway
The price is what the buyer agrees to pay. The representations, the disclosure schedule and the indemnification limits decide how much of it you keep. Disclose fully, insist on sensible qualifiers and limits, and prepare the business so the promises are easy to make, because a problem listed before closing is part of the deal and a problem found after it is a claim.
