Common Representations and Warranties in Business Purchase Agreements
Whether you are buying or selling a business, it is essential to understand how representations and warranties impact the purchase agreement that governs the transaction. The purchase agreement will include both buyer and seller representations and warranties, which are statements and promises the buyers and sellers make regarding the business being sold and their authority to sell it.
What are Representations and Warranties?
Although the terms are frequently conflated, a “representation” is a statement of fact, while a “warranty” is a promise that something is true.
That being said, in practice, a business purchase agreement will include representations and warranties together, often referred to as “reps and warranties,” with buyers and sellers both stating facts and guaranteeing that they are true. Further, if a rep and warranty is subsequently found to be untrue, a ‘breached’ rep and warranty provides some basis for a legal claim against the party that breached said rep and warranty.
Common Types of Representations and Warranties
In a business purchase agreement, the representations and warranties provide assurances to each party, covering various aspects that influence the transaction's success. The exact provisions included can vary depending upon the nature of the business and the specific circumstances involved. However, most purchase agreements include reps and warranties about financial and legal matters regarding the company and each party’s ability to carry out the entirety of their obligations with respect to the transaction.
Some common reps and warranties involving a company’s finances include the following:
The provided financial statements are accurate, complete, and fairly represent the financial condition of the business;
All debts and liabilities incurred outside the ordinary course of business have been disclosed;
All required tax returns have been timely and accurately filed and all taxes have been paid in full; and
For equity transactions, no third party currently holds or will have a future entitlement to any equity securities, and that the purchaser will receive unencumbered title to all purchased securities upon closing
Additionally, legal issues that are often addressed in reps and warranties include:
The purchase agreement does not include untrue statements regarding material facts or omit any relevant material facts;
The business has complied with all applicable laws and regulations;
The business has obtained all required permits and licenses;
There are no pending or threatened lawsuits, claims, investigations, or legal proceedings against the business;
All material contracts and agreements of the business are valid, enforceable, and in full force and effect, and there are no breaches or defaults;
The business is a validly existing legal entity that is in good standing and not in default;
The sellers have a good and marketable title to the assets or equity being sold, free and clear of any liens, claims, or encumbrances; and
The sellers have the legal and corporate authority to enter into the agreement and sell the business
This is by no means an exhaustive list of representations and warranties that can be contained in a business purchase agreement. Be advised that reps and warranties may also cover issues including insurance, employees, product liabilities, intellectual property, and more.
Whether you are buying or selling a business, a seasoned business attorney can help you understand the complicated nature of representations and warranties to help ensure that the purchase agreement you sign fully protects and advances your interests.