When it comes to the sale and purchase of a business, the use of a sale and purchase agreement (SPA) is vital in outlining the terms and conditions of the transaction. One of the key sections of an SPA is the section on representations and warranties. In this article, we will take a closer look at what representations and warranties are and why they are important in an SPA.
What are representations and warranties?
Representations and warranties are statements of fact made by the seller to the buyer about the business being sold. These statements cover a wide range of areas, including financial performance, legal compliance, intellectual property rights, and any liabilities or litigation that the company may be facing.
The purpose of these statements is to assure the buyer that the business is being sold on an accurate and truthful basis. If the seller makes a misrepresentation or fails to disclose a material fact, the buyer may have the right to terminate the agreement or seek damages.
Why are representations and warranties important?
The representations and warranties section of an SPA is an important part of the agreement because it helps to mitigate risk for the buyer. By providing assurance that the seller has disclosed all relevant information about the business, the buyer can make an informed decision about whether or not to go through with the transaction.
Additionally, representations and warranties help to establish the terms of the agreement and provide a framework for resolving any disputes that may arise during or after the sale. In the event that the seller breaches a representation or warranty, the buyer may have legal recourse to seek compensation or terminate the agreement.
What should be included in representations and warranties?
The exact language of the representations and warranties section will vary depending on the specific circumstances of the sale. However, there are some key areas that should be covered in most agreements, including:
Financial statements: The seller should provide accurate financial statements that have been prepared in accordance with generally accepted accounting principles (GAAP).
Legal compliance: The seller should represent that the business is in compliance with all applicable laws and regulations and has obtained all necessary licenses and permits.
Intellectual property rights: The seller should represent that the business owns or has the right to use all intellectual property rights associated with the business, including trademarks, patents, and copyrights.
Contracts: The seller should represent that all contracts related to the business are in good standing and that there are no material breaches or disputes.
Liabilities: The seller should disclose all material liabilities of the business, including any pending litigation or regulatory investigations.
The representations and warranties section of an SPA is a critical component of any business sale. By providing assurances about the accuracy and completeness of the information being provided, the buyer is able to make an informed decision about whether or not to proceed with the transaction. As a professional, it is important to ensure that the language used in this section is clear, concise, and accurately reflects the terms of the agreement.