Seller’s Representations and Warranties in a Business Sale
Out of all the reasons to sell a business, perhaps making some money is one of the best. If you have found a buyer and you are in the contract process, then you’re getting close to getting the cash. A sale price has likely been set, along with the other key business terms of the transaction, and now you and/or your lawyers are looking to wrap things up, complete the sale documents, sign, and get paid. Before you start mentally cashing in that check, or at least before it gets to the point when you are just “done” with the deal, and you actually cash in that check, we suggest that you read through the contract a few more times and pay particular attention to the representations and warranties that you are making in that agreement.
Black’s Legal Dictionary (8th Ed.) defines a representation as a “presentation of fact made to induce someone to act” and a warranty as “an express or implied promise that something in furtherance of [a] contract is guaranteed by one of the contracting parties”. If you think about these definitions, you will see that representations and warranties are very important aspects of the contract. With representations and warranties, you are, respectively, making factual statements with the intent of persuading the other party to enter the deal, and guarantying certain aspects of that deal.
While buyers will also make certain representations and warranties, these are much more limited in scope and impact than those of the seller, and rightfully so. The seller has all of the information about the business that is being sold, and it is seller’s responsibility to provide the information on which the buyer must rely and decide whether to close the deal. In essence, full, accurate and complete disclosure is absolutely vital. Furthermore, if a problem occurs after the sale, the buyer will search the representations and warranties of the seller to confirm whether disclosure was complete, whether the practical operation of the business corresponds to the factual statements made by the seller, and if some guaranty is implicated.
These reasons establish the representations and warranties made by a seller to a prospective buyer as one of the most heavily negotiated aspects of the contract process and one of the broadest areas of liability for the seller. Do not gloss or rush over the representations and warranties, but review them, carefully, multiple times. Amend as needed, make full disclosures, and make sure the contract is accurate and complete, because unless it is written or referenced in the contract, it will likely be excluded from interpretation of the contract. Remember this, as well: just because you have cashed the check does not mean that you are in the clear. Representations and warranties typically “survive”, or continue, past closing for up to several years, so your liability will be ongoing … maybe you should go read through those representations and warranties one more time right now.