Glossary
Representations and warranties
On this page4 sections
What they are
Representations and warranties are statements of fact the seller makes in the purchase agreement: that the financial statements are accurate, that taxes have been filed and paid, that the licences are in good standing, that there is no undisclosed litigation, that the equipment is owned free of liens.
Their function is to allocate the risk of what nobody knows. Diligence finds what it can find; the representations cover what it could not.
Why they are not the same as protection
A representation that turns out to be untrue gives you a claim. A claim is not money. What determines whether it becomes money:
- Survival period. How long after closing each representation lives. Different categories often warrant different periods — tax and environmental representations typically need longer than operational ones.
- Cap. The maximum recoverable, which is frequently a fraction of the purchase price.
- Basket. A threshold below which claims cannot be brought — and whether it is a true deductible or tips from the first dollar once crossed.
- Funding. Whether anything sits behind the promise. See holdback and escrow.
- Who the seller will be. A retiring seller who has distributed the proceeds is a diminishing target regardless of what the agreement says.
Where they meet New York law
A representation does not displace a statutory liability that attaches to you. Purchaser liability for the seller's unpaid sales tax follows the business [1] — so the answer there is to file the bulk-sale notice, not to rely on a representation that the taxes were paid. Do both.
What to do with it
Carve out anything diligence has already identified and cover it by a specific indemnity at its own number, rather than letting a known exposure be absorbed by a basket designed for surprises. See escrow, holdbacks and indemnities.
Frequently asked questions
What do representations and warranties actually do?
They allocate the risk of what nobody knows. Diligence finds what it can find; the representations cover what it could not. The seller states facts about the business, and if a statement turns out to be untrue you have a claim.
What decides whether they are worth anything?
Four things beyond the wording itself: how long each representation survives after closing, the cap on what is recoverable, the basket below which claims cannot be brought, and whether anything funds the promise. An unfunded representation from a seller who has distributed the proceeds is a claim, not money.
What is a basket, and should I accept one?
A threshold below which claims cannot be brought, so small items do not generate disputes. Reasonable in principle. The detail decides whether it is reasonable in practice: whether it works as a true deductible or tips from the first dollar once crossed, and whether the exposures diligence already found are carved out of it. They generally should be.
Sources cited on this page
Every mutable number on this page — program caps, tax rules, thresholds, filing deadlines — traces to one of these primary sources. Rules change; check the source before you act on the number.
- 1 NYS Department of Taxation and Finance. Tax Bulletin ST-360: Purchasers' Obligations to Pay Sales Taxes (Bulk Sales). https://www.tax.ny.gov/pubs_and_bulls/tg_bulletins/st/purchasers_obligations_to_pay_sales_taxes.htm
Educational only — not legal, tax, lending, or investment advice. Confirm specific rules, rates, and forms with the relevant New York State agency, attorney, CPA, lender, or insurer before acting. See the editorial policy and methodology for how sourcing and review work.