What are representations and warranties in a business purchase agreement?

In a business purchase agreement in Ontario, representations and warranties are factual statements that the seller makes about the business as at the closing date. They might cover corporate authority to sell, accuracy of financial statements, completeness of disclosed contracts, absence of undisclosed liabilities, ownership of intellectual property, and compliance with applicable laws.

If a representation or warranty turns out to be false — whether the seller knew it or not — the buyer typically has a right to make an indemnification claim against the seller for the resulting loss. The purchase agreement usually includes a cap on those claims, a deductible (called a "basket"), and a time limit within which claims must be brought.

Sellers negotiate to narrow the representations as much as possible, add qualifications like "to the seller's knowledge," and include strong survival and cap provisions. Buyers push for broad, unqualified statements and long survival periods. The final negotiated language directly determines the practical risk allocation between the parties.

Warranty and indemnity (W&I) insurance is now available in Canada for mid-market transactions and can bridge gaps between buyer and seller risk tolerance — a lawyer familiar with M&A can advise on whether it makes sense for your deal.