When selling your business, you will devote a substantial amount of time and energy to negotiating the representations and warranties in the purchase agreement. Accurate representations and warranties are critical to ensuring that the expectations of the buyer and seller are aligned to minimize the risk of post-closing indemnification claims.
“Representations and warranties are promises made by the seller about the current and future state of the business, assuring the buyer the business is operating the way seller says it is,” says Kate Cooper, shareholder at Babst Calland. “If they are not accurate, a buyer can use these to make a claim for damages post-sale.”
Smart Business spoke with Cooper about why it is critical that representations and warranties accurately portray your business when selling, and how a deal attorney with experience in your industry can help minimize the risk that a buyer will pursue a claim after closing.
What do representations and warranties cover?
Standard representations and warranties in nearly every purchase agreement include that the target entity is in good standing with the state, taxes have been properly filed and paid, and that it is in compliance with all applicable laws. Beyond that, it gets much more nuanced depending on the industry and the nature of the business. A technology company may need to make representations and warranties about its intellectual property, while a manufacturer might address environmental, health and safety issues. If you are selling real estate, you’ll need to make representations about any liens and encumbrances affecting property.
How can an experienced attorney help navigate through the process?
Every deal involves some level of risk-sharing and compromise, and the most effective way to get a deal done is to have seasoned deal lawyers on both sides. An experienced deal lawyer will be able to home in on the most impactful terms of the agreement and highlight the biggest risks to their client. An attorney can advise you on whether you need to make disclosures that set forth exceptions to the statements in a particular representation, whether it is reasonable to attempt to modify a representation with a knowledge or materiality qualifier, and whether it is appropriate to include indemnity limitations.
The owner will be heavily involved in the representations and warranties review, but an attorney can lead you through the process, compiling information about your business that is responsive to the representations and warranties and help evaluate how to communicate that to a buyer with respect to your disclosure schedules and the negotiated language in the purchase agreement.
When choosing an attorney to represent you in a sale, ask about the attorney’s approach to deal-making. Are they going to try to win every single point, at any expense, or will they take a more collaborative approach? There is never a zero-risk deal, but a seasoned attorney will drill down on the key points and focus on the right hills to die on, rather than making a big deal about something that represents an insignificant risk.
Engage an attorney who has done deals in your industry, which will give them a foundational knowledge of the key provisions that are likely to be negotiated and allow them to move the deal forward in the most efficient manner. Ultimately, deal-making is a collaborative process, and the right adviser can help the process run smoothly and get a good result for everyone.
How can you get your business ready for a sale?
Prepare, prepare, prepare. By identifying potential issues early, you can eliminate or minimize risks and address them before the buyer is performing due diligence and you are negotiating the representations and warranties in the purchase agreement. The seller wants to walk away with confidence that post-closing claims are unlikely and their ongoing liabilities are minimized, and buyers want to know they have the ability to make a post-closing indemnification claim to recover their losses if they discover an inaccuracy in the seller’s representations and warranties. Experienced deal attorneys can help balance these competing interests and minimize the risk of costly and time-consuming post-closing disputes. ●
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