What Are You Really Promising? How to Handle Reps & Warranties Like a Pro

Introduction — The Part of the Deal That Determines Whether You Keep the Money

A mentor of mine once told me something I’ve never forgotten:

“A purchase agreement has two jobs: first, to tell you how you get the money — and second, to determine whether you get to keep it.”

Representations and warranties (“R&Ws”), together with the indemnification provisions that follow them, live entirely in that second category.

They are the legal terms that allow a buyer to come back after closing and ask for some of your money back if certain statements about the business turn out to be untrue.

For sellers, this is where risk lives.
For buyers, this is where protection lives.

R&Ws are often long, detailed, and technical — dozens of statements about everything from taxes, to employees, to intellectual property, to contracts. If you’re not careful, it’s easy to get fatigued and assume they are “standard.” They are not. They define the promises you’re making about the condition of your company.

In this post, we’ll make this part of the deal easier to understand by walking through:

1. why R&Ws matter
2. how they relate to indemnification
3. and four real-world examples showing how sellers can reduce risk, protect themselves, and keep more of their proceeds

Let’s start with the big picture.

Why This Matters — R&W Allocate Risk (And Protect Your Proceeds)

Here’s the simplest way to understand representations and warranties:

They are detailed statements the seller makes about the company’s condition — its assets, liabilities, records, taxes, employees, customers, and compliance.

If even one of these statements later turns out to be inaccurate, the indemnification clause is what obligates the seller to reimburse the buyer for resulting damages.

This doesn’t imply bad faith.
It’s simply how the contract allocates risk — particularly risk related to things:

1. the buyer cannot fully verify
2. the seller cannot fully control
3. and neither party can know with complete certainty

For buyers, R&Ws are an insurance policy.
For sellers, this is where careful lawyering preserves the purchase price you’ve worked so hard to earn.

And because these provisions can run 10, 20, even 30 pages long, it takes stamina to review them. This is the point in the deal where many sellers get tired and want to push forward — but this is exactly the time to slow down and be strategic.

To make this easier, let’s explore four examples that show how small adjustments can make a big difference.

Key Insights & Best Practices — Explained Through Four Examples

Rather than walking through every representation one by one, we’re going to focus on four examples that illustrate the core tools sellers use to protect themselves.

These examples show how a single word, disclosure, or qualifier can shift millions of dollars of risk.

Example 1 — How Editing Rep Language Reduces Risk (Knowledge + Scope Limits)

Scenario:

Your company owns proprietary software. The buyer includes the following IP infringement rep:

Buyer’s Draft:

“None of the Seller’s Intellectual Property infringes, misappropriates, or otherwise violates the rights of any third party.”

This is impossible for any company to guarantee.
No one can confirm the entire universe of existing patents or trademarks.

Your Redline (Seller-Friendly Version):

“To Seller’s Knowledge, the Seller’s Intellectual Property, as used in the conduct of the Business as currently conducted, does not knowingly infringe or misappropriate any Intellectual Property rights of any third party.”

Why this matters:

1. “To Seller’s Knowledge” eliminates liability for unknown risks.
2. “As used in the Business” avoids liability for hypothetical or unintended uses.
3. “Knowingly” avoids liability for accidental overlap or minor technical issues.

Takeaway:

A single sentence can remove a massive amount of risk.
This is where careful drafting matters.

Example 2 — How Disclosure Schedules Protect Sellers (The Pending Customer Dispute)

Disclosure schedules are one of the most powerful tools in an M&A deal. They list exceptions to the R&Ws — and once disclosed, the buyer cannot later claim you misrepresented the business.

Scenario:

Six months ago, your company missed a major delivery milestone with a key customer. You believe the issue is resolved — you made the delivery, offered a courtesy credit, and moved on.

The customer disagrees.

They’ve sent several emails reserving their rights and indicating that they may still claim damages. They haven’t taken formal action, but their position is clear: they believe the matter isn’t closed.

The buyer’s draft includes the following representation:

Buyer’s Draft:

“Seller is not in breach or default under any Material Contract.”

Why this rep is technically untrue:

Even if you believe the cure was effective, the counterparty’s written reservation of rights creates a pending dispute — which in contract law is treated as:

1. an alleged breach
2. an unresolved default
3. a potential claim

This makes the rep inaccurate if left unqualified.

Your Fix:

Step 1 — Amend the rep:

“Seller is not currently in breach or default under any Material Contract, except as set forth on Schedule 4.10.”

Step 2 — Disclose the issue on Schedule 4.10, including:

1. the original missed milestone
2. the timing of the cure
3. the courtesy credit
4. the customer’s reservation-of-rights emails
5. your most recent correspondence

Step 3 — Provide context, so the buyer understands the risk and how you have been mitigating it.

Stock Sale vs. Asset Sale Note:

1. In a stock sale: once this is disclosed, the buyer should not be able to later claim indemnity for it.
2. In an asset sale: the seller typically retains liability for pre-closing conduct — but disclosure prevents the buyer from re-trading the deal or alleging misrepresentation after closing.

Takeaway:

Disclosure is a shield.

If there is any dispute, allegation, or open issue — disclose it.

Example 3 — Some Liabilities Stay With the Seller (Even in Stock Sales)

Scenario:

Your company is currently facing a wage-and-hour claim filed by a former employee. The matter is ongoing and unresolved.

Even in a stock sale — where the buyer purchases the entire entity — this is considered a seller-retained liability.

How it's handled:

1. Revise the litigation rep:

   “Except as disclosed on Schedule 4.12, there is no pending or, to Seller’s Knowledge, threatened litigation involving the Company.”
   
   

2. Disclose the lawsuit in the schedule.

3. Add a “special indemnity” confirming the seller will remain responsible for this claim post-closing.

   Why this matters:

Certain types of risk always stay with sellers, including:

• pending litigation
• wage-and-hour claims
• government investigations
• environmental issues

Disclosure is necessary — but not sufficient — for these categories.

Takeaway:

Some liabilities naturally stay with you as the seller.
A good lawyer ensures they're compartmentalized and handled outside the general indemnity structure.

Example 4 — Using Materiality to Avoid “Gotcha” Liability

Scenario:

The buyer includes a representation stating:

Buyer’s Draft:

“Seller is in compliance with all laws.”

This is impossible. Every business has small, immaterial issues (sometimes bigger ones) — late filings, minor licensing updates, technical HR lapses.

Your Redline:

“Seller is in compliance in all material respect with all laws.”
or
“Seller has not received written notice of any material violation of law.”

Why this matters:

Without the word material, any small issue becomes ammunition for a future claim.

Takeaway:

Materiality qualifiers protect sellers from trivial, technical, or inconsequential issues becoming indemnifiable claims.

4. How Paracuellos Law Group Helps

At Paracuellos Law Group, we help sellers navigate this part of the deal strategically — not reactively. Our role includes:

• Identifying red flags early through a seller-side readiness review
• Drafting smart, accurate disclosure schedules
• Adding key qualifiers (knowledge, materiality, and scope limitations)
• Negotiating caps, baskets, and survival periods
• Addressing seller-retained liabilities (like pending litigation)
• Coordinating with your CPA on sensitive tax representations

Our philosophy is simple:

We protect your ability to keep the money you’ve earned from the sale of your business.
Big-firm experience. Right-sized for your business.

5. Takeaways

Representations and warranties may look like fine print, but they shape the entire risk structure of your deal.

As that mentor wisely put it:

Getting the money is one thing. Keeping the money is another — and R&Ws are where that second part is won or lost.

To understand how indemnification provisions limit your post-closing liability, continue to Topic 6: How to Protect Yourself After the Sale — The Seller’s Guide to Indemnification.

If you’re preparing to sell, we’d be honored to help you evaluate risks and protect your proceeds.
Schedule a consultation today.