Seller Representations and Warranties in a Purchase Agreement

When buying or selling a business, a purchase agreement is the foundational document that outlines the terms and conditions of the sale. One key component of this agreement is the inclusion of seller representations and warranties. But why are there often so many of them?

What are Representations and Warranties? Simply put, representations and warranties are statements made by the seller about the business. They give the buyer a clear picture of the current state of the business and its history.

Representations - Factual statements about the past and present state of the business.

Warranties - Assurances about the condition of the business and a promise that certain conditions hold true.

Why So Many?

Protecting the Buyer: Buying a business is a significant investment. The buyer is often making decisions based on limited information. Representations and warranties act as a safety net, ensuring the buyer knows exactly what they are getting.

Clear Disclosure: Representations obligate the seller to provide full disclosure on all aspects of the business. From finances and assets to contracts and employee relations, the more the buyer knows, the more informed their decision will be.

Establishing Liability: If any of the statements are found to be untrue after the sale, the buyer may have a basis to claim damages. The seller is made accountable for the accuracy of the statements made and information provided to the buyer.

Customization for Each Deal: Every business is unique, and so are its challenges and strengths. Multiple representations and warranties allow the purchase agreement to be tailored to the specific needs and intricacies of a transaction for each business.

Common Types of Representations and Warranties:

Financial Statements: Confirming the accuracy of the business’s financials.

Assets: Stating the condition and ownership of assets.

Compliance with Laws: Assuring the business has no legal violations.

Employment: Details about employee contracts, benefits, and any pending labor issues.

Intellectual Property: Information about trademarks, patents, copyrights, and more.

Environmental Issues: Confirming no pending environmental claims or liabilities.

Contracts: Stating that all significant contracts are valid and in effect.

Takeaway:

Representations and warranties play a crucial role in business transactions. They act as the seller’s assurance to the buyer about the state of the business, reducing risk and increasing transparency. Both parties, armed with clarity and protection, can confidently move forward with the transaction.

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