Buyer RepresentationsAttorneys love "all cash" deals for one simple reason: it greatly simplifies the reps and warranties required. When non-cash consideration is provided (such as shares), the seller will typically become more stringent on the representations and warranties. This is because the fair market value of the shares is, like the seller's business, dependent on the viability, sustainability, and profitability of the buyer’s business. The risks inherent to the buyer become relevant and material to the seller’s shareholders, which leads the seller to require verification through more stringent buyer reps and warranties.
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 include such details as how, when and where the money will be wired.
Seller RepresentationsSome seller reps and warranties 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 it will own the business once consideration is paid and the deal closes.
From the buyer's point of view, the most important seller representations are those related to the nature, value, and operations of the company being purchased. 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. Terminations typically occur when 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 purchase and sale agreements:
Financial StatementsTypical financial statement representations will require the financials be in accordance with generally accepted accounting principles, complete, fairly representative of the business, and factually correct for the showcased periods. In some cases, other reps may be required that reflect adherence to Sarbanes-Oxley.
Accounts ReceivableA/R can be one of the most hotly contested reps included in the agreement process. Buyers and sellers will not only view the A/R in a completely different light, but they’ll also have competing ideas on how the A/R should be treated, who should be responsible for its collection, and at what rate. In a typical transaction, sellers represent there are no known claims to offset A/R amounts in allowance for doubtful accounts. In most cases, reps include some variation on the guarantee for the collection of A/R and include detailed information on how A/R will be treated after the transaction has taken place.
Most sellers fail to recognize the need to spell out A/R and collection info before the transaction concludes. A/R that exists after a transaction, if not explicitly spelled out, will be under the power of the new owners and thus more difficult to access. This can be especially detrimental if the A/R is large and a portion of the payout or an earnout is dependent on A/R.