As a business transaction progresses, getting into the weeds on some of the details relative to deal-closing can become a hassle, especially if either party has less experience or is unwilling to capitulate. The information in this post is meant to shed some light on the various reps and warranties typically provided by both buyers and sellers and what each means for the parties involved in the transaction.
Attorneys love “all cash” deals for one simple reason: it greatly simplifies the reps and warranties required. When other considerations are provided–such as securities–the seller will typically become more stringent on the representations and warranties. Sellers will often require more in-depth and extensive representations and warranties when the buyer offers securities because the value of said securities are, like the seller’s business, dependent on the viability, sustainability and profitability of the buyer’s business. The risks of the buyer then become relevant and material to the seller’s shareholders and thus the seller may then require similarly stringent reps and warranties toward the buyer.
Apart from the form of payment, the seller will typically only require the buyer represent itself as duly authorized and financially able to make the purchase and bound by the agreement to follow-through. If the seller is satisfied with the buyer’s ability to pay, the reps and warranties are typically very simple and will also include such details as how, when and where the money will be wired.
Some reps, while seemingly obvious, are standard language in a transaction. For instance, all buyers will want representation that the seller is fully authorized to sell. The buyer wants to be assured that when the deal closes and consideration in the form of cash or securities is given that the buyer will subsequently own the business.
The most important component of seller reps and warranties is the need for the buyer to obtain any and all information from the seller regarding the nature, value and operations of the company. Most representations are written so as to force the seller to disclose information material to the company that may not otherwise be obvious or discovered during other processes, including due diligence.
Such representations also give the buyer more latitude in controlling a potential termination of the agreement if in the event that such a termination is needed. Terminations typically occur in the event that any representations spelled out in the acquisition agreement are determined to be false or misleading.
The following are detailed explanations of reps and warranties typically included in standard acquisition agreements.
Fast deal closing is rare thanks to many of the required representations and warranties included in some of today’s most in-depth M&A deals. The details and nuances inherent throughout the negotiation process can cause many deal-makers and sellers to get caught-up in “the thick of thin things.” Simplifying the process by understanding such nuances and keeping a cool head provides assurances that deals will be completed with as little headache as possible. In my humble opinion, it’s a miracle anytime a deal is successfully completed, especially when you look at all the reasons many buyers could use to simply back-out after a rep and warranty agreement is forthcoming. Luckily, the cooler heads do prevail and value is eventually traded for value. That’s what I love about this business.