What clauses should a business owner pay particular attention to in a Purchase Sale Agreement?
Q:A buyer and I have signed a letter of intent and are moving to complete a Purchase Sale Agreement. What clauses should I pay particular attention to?
A: Reps and warranties, which essentially deal with the allocation of risk, are a little tricky. Business owners should go through those carefully. You are making representations and warranties to which you will be held accountable and you are making them according to a certain knowledge standard. So if I say to you for example, "We have no labor and employment disputes." That means no, none, right? If I say to you, "To the best of my knowledge, we have no labor or employment disputes." Well, that’s different. That means that you are not aware of any labor or employment disputes. If I say, "We have no material labor and employment disputes." Well, that’s saying that we have some but they are no big deal. You see how those three answers are different? One is an absolute, one is saying, "We might have but I just don’t know about it," and the third is saying, "Yeah, we’ve got some but they are no big deal."
Well, now we have to define what does a "big deal" mean and what does materiality means? So pay careful attention to the reps and warranties that you’re making. Pay careful attention to the knowledge standard that’s being applied. This is what often trips up business owners in post closing disputes.
The second thing I would say to this question is look carefully at the conditions to closing. They may be mechanical or logistical issues but they are still your problem. If there are 10 things you need to get done as a condition of closing, you better know what they are. It’s just like selling a house. If the buyer says, "We’ll go to closing as soon as you fix the leaky drain, as soon as you take the stain off the wood floors, as soon as you get the stink out of the basement from black mold," those are all things that are your responsibility or you don’t go to closing. So read those conditions to closing carefully, have a game plan, and a team in place for addressing those conditions to closing.
Well, now we have to define what does a "big deal" mean and what does materiality means? So pay careful attention to the reps and warranties that you’re making. Pay careful attention to the knowledge standard that’s being applied. This is what often trips up business owners in post closing disputes.
The second thing I would say to this question is look carefully at the conditions to closing. They may be mechanical or logistical issues but they are still your problem. If there are 10 things you need to get done as a condition of closing, you better know what they are. It’s just like selling a house. If the buyer says, "We’ll go to closing as soon as you fix the leaky drain, as soon as you take the stain off the wood floors, as soon as you get the stink out of the basement from black mold," those are all things that are your responsibility or you don’t go to closing. So read those conditions to closing carefully, have a game plan, and a team in place for addressing those conditions to closing.
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Written by Andrew J. Sherman
Andrew J. Sherman is a Partner in the Corporate Department of Seyfarth Shaw LLP
