Representations and Warranties, commonly called Reps & Warranties, is a clause(s) in an acquisition purchase agreement made by both the buyer and seller to disclose material information.
The seller’s reps and warranties are usually more extensive as they include information about the company being sold.
The representation part is a statement as to a fact., the warranty is a promise of indemnity if that statement is false. So, in an M&A situation, the seller is essentially guaranteeing certain things in a transaction.
Generally, buyers want to have as many Reps & Warranties as possible. But sellers want to be careful and not over-promise or over-reach on what they represent and warrant.
The most important point is which Reps & Warranties exist after the closing and for how long the seller has responsibility for them after the sale.
Here are some items often included in the Reps & Warranties section of a company’s purchase agreement.
Financial Statements: usually an audit, or at least a review, of the company’s financial statements is conducted to verify accuracy. Especially inventory, receivables, and payables. A post-closing financial statement is often produced.
Taxes: the buyer will want to make sure all taxes are paid and there are no tax liens on equipment and machinery.
Litigation: Usually the seller has a time period that limits their liability for any potential or pending litigation that may arise.
Assets: usually this refers to the representation that all equipment is in good working order. Also, that the company has full and clear title to all assets used in the business.
Environmental: A new business owner could be held responsible for environmental issues in the company’s facilities. Even if that facility is leased. Even if it was caused many years prior to the new owner taking control. I recall a situation where an entire transaction almost was canceled because of a leaking chemical tank from many years earlier. It wasn’t disclosed to the buyer upfront and only became known during due diligence.
Employee Relations: Labor contracts, agreements, and so on are important even in an asset sale. The new owner needs to be careful about making changes to labor agreements and therefore needs to understand what is contained in those agreements.
