13 Representations and Warranties Issues to Consider

13 things to look for in a seller’s representations and warranties 

My name is Joe Whitcomb coming to you from Whitcomb Selinsky PC. We are a Denver-based law firm in the South Metro portion of Denver Colorado. It is April 6, 2020, and we are in the throes of the COVID 19 crisis. I am bringing you another episode of Vetbizlawyer podcast and video. Today I'm going to speak to you about representations and warranties which are documents that normally accompany the purchase or sale of a business. For most of today's discussion I'm going to be bringing you items you would be looking for as a buyer in the seller's representations and warranties. 

The Company that you as the seller are acquiring is usually referred to as the target company. The representations and warranties are normally presented to you during the course of the transaction but before you actually close on the purchase of the company. The name representations and warranties, does a good job describing what the documents are. Representations are issues that the seller of the Company is informing the buyer about before the purchase. Warranties go farther than that in that they are more akin to a guarantee. Normally, as a buyer, if a seller meaningfully misrepresents a warranty, you would have the option of withdrawing from the purchase or getting a portion of your money refunded by the seller.

Conclusion

 If you are currently asking yourself, "why go to the trouble of getting all of these representations and warranties in writing?" It may be because your planning on doing a thorough due diligence investigation before closing. However, that process will be time-consuming and expensive. Getting the seller to make meaningful commitments in its representations and warranties, could make the costs of unearthing negative information expensive for the seller. 

 Put differently, if the seller knows that you have the authority to not only pull out of negotiations but also the authority to charge the seller money for your time and financial investment then it may incentivize a more truthful disclosure from the outset. Also remember, most Letters of Intent come with exclusivity provisions, which means that while you are negotiating the purchase of this company you will be foreclosed from purchasing one of the seller’s competitors. This means you are effectively "out of the market" the entire time you are performing your due diligence on the target company. Of course, the same is true for the seller, but they may not have the same urgency that you do in the transaction. Therefore, a great way to save you time, money, and aggravation is insisting on thorough and accurate representations and warranties covering the above 13 items. 

This is all for this week’s vetbizlawyer video and podcast. I hope that you and yours are safe and secure during this COVID crisis.