Does Your Asset Purchase Agreement Include Representations by the Owners of the Seller?

What Business Owners Should Know

• Representations and warranties define what the seller is promising about the business.

• If only the company signs, it may be hard to recover losses after closing.

• Having owners sign adds accountability and protection for the buyer.

• Escrow, caps, and insurance can balance risk for both sides.

• The best protection comes from careful negotiation and sound legal guidance.

In any asset purchase transaction, the buyer needs more than the seller’s assurance that the business is sound. It is not enough to say taxes are filed, financial statements are reliable, and all contracts comply with applicable laws. What the buyer actually needs are clear, enforceable promises set out in the purchase agreement as representations and warranties.

If those promises come only from the company, the buyer faces risk. Once the purchase price is paid and the entity winds down, there may be no way to recover losses from undisclosed liabilities or defects in the purchased assets.

Welcome to the eighth article in our series, “What’s Missing From Your Asset Purchase Agreement?” Previously, we discussed the importance of requiring a certificate of good standing to confirm that the seller is duly organized and validly existing under applicable laws.

In this piece, we turn to representations made by the owners themselves. We look at why buyers push for these protections, how they shape the balance of risk in an asset purchase transaction, and what they mean for both sides of the deal.

What Are Representations?

Representations are statements of fact made by the seller in the asset purchase agreement that capture the condition of the business at the closing date. They operate like a legal snapshot of reality, covering core areas such as:

• Corporate status and authority
• Ownership of purchased assets
• Accuracy of financial statements
• Validity of contracts
• Compliance with applicable laws

These seller representations matter because they give the buyer legal assurance that the purchased assets are what they appear to be. Without accurate representations, the buyer risks paying a purchase price that does not reflect the true value of the assets, only to discover undisclosed liabilities or a material adverse effect later.

What Are Warranties?

Warranties are the promises that stand behind seller representations in an asset purchase agreement. They do more than confirm that statements are accurate on the closing date: they also ensure that if those statements prove false, the seller will be responsible for the consequences.

For example, if financial statements later turn out to be inaccurate or undisclosed liabilities come to light, warranties give the buyer a direct claim for damages. Without warranties, the buyer could pay the full purchase price only to find that the purchased assets carry hidden problems with contracts, intellectual property rights, or compliance with applicable laws.

The Problem: Who Really Stands Behind the Promises?

Now that we understand what representations and warranties are, the next question is who actually makes these promises in an asset purchase agreement. In most asset purchase transactions, the seller is an LLC or a corporation. Because the entity is treated as a separate legal person, it can sue and be sued, and on paper, it seems like the right party to stand behind the seller representations.

The Buyer's Perspective

As the buyer, certainty is everything in an asset purchase transaction. Your purchase agreement may include seller representations and warranties. But if those promises come only from the selling company, you face a real gap in protection. Once the purchase price is paid and the entity is wound down, you may have no practical way to recover damages for undisclosed liabilities or a material adverse effect that appears after closing.

That is why you may consider requiring asset purchase agreement representations from the owners of the seller themselves. When owners sign, they become personally responsible if the statements about the purchased assets later prove false.

The Seller's Perspective

When you form an LLC or corporation, the law gives you a shield. The entity becomes the legal party that owns the business, holds contracts, and is responsible for liabilities. Your personal wealth is not supposed to be at risk. That is the core benefit of limited liability, and it is why most owners choose these structures in the first place.

This is why you may resist when a buyer asks you to personally sign asset purchase agreement representations. From your perspective, signing undermines the very protection you created when you formed the company. If the financial statements turn out to be inaccurate, or if undisclosed liabilities emerge, you worry the buyer will come after your personal assets rather than limiting claims to the company.

Is a Middle Ground Possible?

In many asset purchase transactions, the buyer and the seller’s owners start from opposite ends. The buyer seeks maximum protection through broad asset purchase agreement representations, while the seller wants to preserve the limited liability shield that motivated them to form an LLC or corporation in the first place.

Escrow

One way forward is to use escrow or holdback tools. Instead of paying the entire purchase price at closing, the buyer may set aside a portion in an escrow account for a defined period. If undisclosed liabilities or inaccuracies in disclosure schedules later surface, the buyer can draw from that escrow without chasing an empty company.

From the seller’s perspective, this structure is workable because they still receive most of the funds upfront while limiting their personal exposure. From the buyer’s perspective, it ensures there is money available to address breaches of representations and warranties tied to the purchased assets.

Caps and Baskets

Another tool often used in asset purchase transactions is the “basket.” A basket sets a minimum threshold of claims that must be reached before the seller owes anything under the purchase agreement. This prevents buyers from dragging sellers into disputes over small-dollar items. On the other side of the equation, a “cap” places a ceiling on how much the seller can ultimately be required to pay if representations and warranties prove false.

For example, the parties may agree that liability for inaccurate financial statements or undisclosed liabilities cannot exceed a set percentage of the purchase price. Together, caps and baskets create balance: they assure the buyer there is accountability for meaningful breaches, while protecting sellers from unlimited exposure that could reach their personal assets.

Insurance (Representation & Warranty Insurance, or “RWI”)

Insurance can also bridge the gap in an asset purchase transaction. Representation and warranty insurance, or “RWI,” is a policy that shifts the risk of breaches in asset purchase agreement representations away from the buyer and seller and onto an insurer.

For sellers, RWI offers a clean exit without tying up the purchase price in escrow or risking personal assets, while buyers gain the assurance that any breaches of representations and warranties will be covered. The trade-off is cost: these policies are expensive and must be factored into the economics of the purchase agreement.

Takeaways for Business Owners

At the end of the day, an asset purchase agreement is about trust backed by structure. Representations and warranties bridge that trust, but they also shift risk. Whether you are selling and trying to protect the shield of your LLC, or buying and making sure the financial statements and purchased assets reflect reality, a lawyer helps set the guardrails.

Are you wondering about any of the issues mentioned above? Please email us at info@wilkinsonlawllc.com or call (732) 410-7595 for assistance.

At Wilkinson Law, we give business owners the clarity they need to fund, grow, protect, and sell their businesses. We are trustworthy business advisors keeping your business on TRACK: Trustworthy. Reliable. Available. Caring. Knowledgeable.®

FAQs

If I Am Selling My Company, Do I Have to Give Owner-Level Asset Purchase Agreement Representations?

Not always. Whether owners must sign depends on negotiation, the scope of seller representations, and the balance of protections like escrow, caps, baskets, or insurance.

How Long Do Representations and Warranties Survive After the Closing Date?

Survival periods vary, but many purchase agreements set specific timelines, often 12–24 months, for bringing claims related to financial statements, contracts, or undisclosed liabilities.

What Happens if Undisclosed Liabilities Show Up After the Asset Purchase Transaction Closes?

If the purchase agreement includes warranties that survive closing, the buyer may bring a claim against the seller (or in some cases, against the owners personally) for damages.