What are Representations and Warranties?
The Short Answer
Representations and Warranties explained simply
Representations and warranties, often called R&W, are promises a seller makes about their business during a sale. Think of them as a detailed snapshot of the business at a specific time. They cover everything from financial health and assets to legal compliance and customer contracts. If any of these statements turn out to be false after the sale, the buyer can seek compensation from the seller. This protects the buyer from hidden problems and ensures the seller is honest about what they are selling.
Real-World Example
The Software Company Sale
Imagine a software company being sold. The seller states in the purchase agreement that all their software licenses are valid and up-to-date. This is a representation and warranty. If, after the sale, the buyer discovers that some key licenses expired months ago, causing a major disruption, the buyer can claim damages from the seller based on the breach of that warranty.
Why this matters
Representations and warranties are crucial for both buyers and sellers. For buyers, they offer protection and a way to recover losses if the business isn't as described. For sellers, they define what they are accountable for after the sale. They help build trust and clarify expectations, making the deal safer for everyone involved.
Always review representations and warranties carefully. They are a key part of the deal and define your risks and protections. Don't rush this section.
Always review representations and warranties carefully. They are a key part of the deal and define your risks and protections. Don't rush this section.
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