Taxes - Lists any tax liabilities and assures the buyer that all tax obligations have been paid or properly reserved for.

1. What Are Representations and
Warranties?

2. Representations and warranties are a critical and integral
component of business transaction agreements and can
vary significantly based upon the type and complexity of
the deal. While there are a variety of names for these
transactional documents, the most common terms are:
Asset Purchase Agreements (APA), Definitive Purchase
Agreements (DPA) and Purchase & Sale Agreements
(PSA). Reps and Warranties should be carefully
considered and customized to the specific transaction to
ensure they accomplish the objectives of each party.

3. Representation:
A representation is defined by Black's Law Dictionary as "A
presentation of fact -- either by words or by conduct -- made to
induce someone to act, especially to enter into a contract." While
both buyers and sellers make representations and warranties in a
transaction document, the seller's representations generally
comprise the largest component. A seller will make
representations, as assurances to the buyer, that involve a litany of
financial, legal, and operational issues pertaining to the business
being sold, from both the past and present. Buyers' representations
generally revolve around acquisition financing as they may be
required to provide assurances that financing commitments are
firm and that they are capable of satisfying a cash payment at
closing. In very limited situations there exist circumstances where a
representation has a "knowledge" qualifier, meaning that the seller
is only responsible for a breach if it was known that the
representation was false.

4. Warranty:
Whereas, a representation is a statement of a present or past fact at
the time the representation is made, a warranty is a promise
extending into the future, typically beyond the purchase contract
phase.
The distinction between representations and warranties has lost some
relevance as most acquisition agreements will use these two terms
in tandem. Using the terms "representations" and "warranties"
together blends the past, present and future within the contract. In
most cases, especially for small business acquisitions, a buyer and
seller sign an agreement in which they "represent and warrant" a
variety of statements - some past, some present, and some future,
without clarifying which of these are representations and which are
warranties.

5. Representations and Warranties serve several
important purposes:
In most agreements, one party is relying on specific data from
another party, all of which might not be available through due
diligence. These representations and warranties become a
useful device to obtain disclosure of critical information about the
business.
Representations and warranties create a basis for either a delay in
closing or a termination of the deal, should subsequent due
diligence uncover inconsistent or false information before
closing.
The representations and warranties provide the framework for the
seller's indemnification obligations to the purchaser after a
transaction closing. Breaches of representations and warranties
form the basis for indemnification claims where the buyer is able
to seek compensation for any damages incurred.

6. While the boiler plate provisions for standard agreements
are too numerous to discuss here, listed below are the
more common representation and warranties:
Corporate Organization- Business was properly formed and has
the necessary licenses and authority to operate.
Authorization / Valid & Binding- Corporate resolution and/or all
other internal approvals (owners/board of
directors/shareholders) documenting that the sale has been
authorized.
Financial Statements - Assurance that the financial statements
provided to the buyer are accurate and complete in all material
aspects.
Assets/Liabilities- Detailed listing of what assets are included in the
transaction and assurances that the seller has good, valid, and
marketable title. Additionally, an outline of the specific liabilities
that are being assumed by the buyer and assurances that there
are no undisclosed liabilities or obligations (typically for stock
sales).

7. Compliance with Laws/Litigation- Business is not in violation of any
state, federal, or local law. Additionally, there is no pending or
threatened litigation.
Taxes - Lists any tax liabilities and assures the buyer that all tax
obligations have been paid or properly reserved for.
Employee Benefits- Lists any HR issues related to employment
laws, potential litigation, and unfunded pension liabilities.
Environmental- Indicates that the seller has complied with all
environmental laws and regulations and discloses any issues
the business has had in the past (e.g. hazardous materials).
This is pertinent when real property is involved.
Contracts- List of the material agreements and contracts with
vendors, manufacturers, or clients and certifies that they are
valid & enforceable and confirms that the seller is not in breach
of any of them.

8. Regardless of the size or structure of a business acquisition, the
purchase agreements will involve a number of representations
and warranties that provide each party with essential
assurances on the nature, scope, and particulars of the deal.
Representations and warranties are critical sections of the
agreement, often involving considerable negotiation between
parties, and it is highly recommended to involve an attorney
early in the process who is skilled in drafting purchase
agreements for the particular industry and size of transaction
being considered. Both buyers and sellers should give
considerable thought to the representations and warranties that
are essential to them and communicate these to the other party.
This ensures that they are properly reflected in the transaction
document, thereby avoiding unpleasant surprises, costly time
delays and considerable unexpected expenses.

9. Resources;
http://salestaxstrategies.com/firm-overview.html
http://ezinearticles.com/?What-Are-
Representations-and-Warranties?&id=5748550

10. Thank you for reading!