In stage Step 5 of the buying process, you will negotiate a bunch of legal documents, one of which is called the Purchase and Sale Agreement. Within this document, there will probably be a section called Representations and Warranties.
Now I know legal documents can be a pain and it seems lawyers write them in a way to force you to hire a lawyer just to read them. However, you are going to want to pay attention to the Reps and Warranties section.
By the way, our attorney has indicated that we need to tell you that the geniuses at Biz Buyer Central are not attorneys and we are not giving you legal advice. For legal advice, consult an attorney.
What are Representations and Warranties
Reps and Warranties are a fancy way to describe statements of fact that the Seller will make to you about the condition or situation of the business at the time of sale.
It is something like a warranty for a car, but in this case, for a business. If a seller says something is true and it turns out to be false, they could be liable for damages. Here is the fancy definition of Representations and Warranties:
A representation is an assertion as to a fact, true on the date the representation is made, that is given to induce another party to enter into a contract or take some other action.
A warranty is a promise of indemnity if the assertion is false.
Great, can you give me some examples of Representations and Warranties
Reading attorney speak is always a fun time, but actual examples of Reps and Warranties would be more helpful. Here are a few examples of the types of Representations and Warranties that exist:
- The business is properly organized and in good standing with the state in which it is located
- The financial statements presented are fair and accurate
- The business owns any trademarks, copyrights, or patents necessary to operate the business
- The company is current with all taxes required
- There is no outstanding litigation
- No one else can make claims of ownership of the business
Go deeper on Representations and Warranties
People always seem to have a problem getting familiar with the documents involved in buying a business like representations and warranties. If this sounds like you, it may be a good idea to buy this book: Here’s The Deal: Everything You Wish a Lawyer Would Tell You About Buying a Small Business. This is a very helpful book to help you with documents, contracts, and other legal issues that may come up when buying a business. It is worth the read.
Click the book image to learn more
Final thoughts on Representations and Warranties
Unless you are really comfortable reading legal documents, you will probably want to get the help of an attorney when you are buying a business. You want to make sure you are protected with representations and warranties and that you are buying a business that works for you.
Buying a business is a significant purchase and you are going to want to do it right. The price of paying an attorney to look out for you is pretty low compared to how much it could cost if you make a mistake. So basically what we are saying here is – Get an attorney.
Now, go out there and own your future!
Sample Representations and Warranties Text
- Organization: The Company is a validly existing, duly organized corporation in good standing in the State of __, has the power to conduct its business in the current manner, and is qualified to conduct business in all jurisdictions in which the location and character of assets owned by it, or in which the nature of its business transactions requires qualification, or in which failure to so qualify would have an adverse material impact on it. To the Company’s knowledge, no penalty or proceeding is pending or threatened in which it is alleged that the nature of the Company’s business necessitates qualification in any additional jurisdiction.
- Authority: The Company has full authority, power, and rights to enter into this Agreement and into each document, agreement, and instrument to be executed and delivered by the Company pursuant to this Agreement and to carry out all transactions contemplated hereby and thereby. No consent or waiver of any person is required in connection with the delivery, execution, and performance by the Company of this Agreement, and each document, agreement, and instrument to be executed and delivered by the Company pursuant to this Agreement.
- Capitalization: The Company’s authorized capital stock solely consists of shares of common stock, of which shares are issued and outstanding, and authorized shares of preferred stock, of which shares are issued and outstanding. All the Company’s shares are owned of record and beneficially by the shareholders in the amounts set forth in the [attached schedule]. No outstanding dividends exist, current or accumulated, due or payable on any of the Company’s capital stock. Any stock to be issued to the Acquirer is, and when delivered pursuant to this Agreement will be, (i) duly authorized, validly issued, and outstanding; (ii) non-assessable, fully paid and free of preemptive rights; and (iii) free and clear of any and all restrictions, pledges, charges, claims, liens, encumbrances, security interests, or other interests of third parties of any nature whatsoever. As of the date hereof, there exist no outstanding warrants, options, rights, agreements, or commitments of any kind for the issuance or sale of, or outstanding securities convertible into, any additional shares of any class of the Company’s capital stock, and there exist no voting agreements, voting trusts, proxies, or other instruments, agreements, or undertakings with respect to the voting of any Company stock to which the Company or any of its shareholders is a party.
- Financial Statements: The Company’s financial statements present fairly the Company’s financial condition on the dates upon said statements and the results of its operations for the periods thereby covered and will be prepared in accordance with generally accepted accounting principles and practices consistently applied and consistent with the Company’s accounting books and records.
- Litigation. There are no lawsuits, actions or administrative, arbitration or other proceedings or governmental investigations pending or threatened against or relating to the Company or the Company’s properties or business. The Company has not entered into or been subject to any consent decree, compliance order, or administrative order with respect to any property owned, operated, leased, or used by the Company. The Company has not received any request for information, notice, demand letter, administrative inquiry, or formal or informal complaint or claim with respect to any property owned, operated, leased, or used by the Company or any facilities or operations thereon. The Company has not been named by the U. S. Environmental Protection Agency or a state environmental agency as a potentially responsible party (or similar designation under applicable state law) in connection with any site at which hazardous substances, hazardous materials, toxic substances, oil, or petroleum products have been released or are threatened to be released. There are no existing or, to the knowledge of the Company, threatened product liability, warranty, or other similar claims, or any facts upon which a claim of such nature could be based, against the Company for services or products which are defective or fail to meet any service or product warranties which could reasonably be expected to have a material adverse effect on the Company.
- Compliance with Laws. The Company is not in material violation of any laws, rules, or regulations which apply to the conduct of its business or any facilities or property owned, leased, operated, or used by the Company. There has never been any citation, fine, or penalty imposed, asserted, or threatened against the Company under any foreign, federal, state, local, or other law or regulation relating to employment, immigration, occupational safety, zoning, or environmental matters and the Company is aware of no current circumstances likely to result in the imposition or assertion of such a citation, fine, or penalty.
