Representations and Warranties

If you plan to sell a business in California, we provide all the information you will need to know about representations and warranties and what you are required to disclose to the buyer.

As a baby boomer business owner in California, there are many different ways to plan a transition of business ownership, but they all require some planning. In this post, we will walk you through everything you need to know about representations and warranties when selling a business.

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Representations Clause

Representations include the following information about the business:

1. Stocks
2. Liabilities
3. Assets

Example Representations Clause

The company and the seller represent to the buyer that all representations in the Agreement are accurate on the date of this Amendment. The buyer intends to rely on the representations in entering this Agreement and conclude the purchase and sale contemplated by this Agreement.

Representations Clause Example

An example of a representations clause is the seller telling the buyer what business’s sales were in the last year. If the seller says the business’s sales totaled $8,000,000, the buyer can request that the seller provide financial statements to prove this is true.

Warranties Clause

Warranties provide the buyer protection from financial, operation, and legal ramifications if the representations made by the seller become inaccurate. Warranties also give the seller the right to cancel the contract.

Example Warranties Clause

Each of the warranties of the company and the Seller shall be accurate in all aspects as of the date on this Agreement and as of the Closing Date as though made on and as of the Closing. By the Closing, the Company and the Seller shall have performed all their obligations which by the terms are to be completed by the Closing.

Warranties Clause Example

An example of a warranties clause is the buyer providing expected minimum sales the buyer will achieve based on the representations of the business’s sales over the last 12 months. 

If the business does not reach the minimum sales listed in the warranties clause, the buyer can claim any damages caused by the breach of this warranty.

Warranty vs. Representation

The critical difference between representations and warranties is the consequences if the representations become inaccurate or the warranties become breached.

When representations become inaccurate, the party may gain the right to rescind the contract and additional damages based on the seriousness of the representations’ inaccuracies.

When warranties become breached, the indemnification clause may award the party damages but not necessarily the option to rescind the contract.

Seller’s Disclosure Form

A Seller’s Disclosure Form provides the buyer with information regarding different aspects of the business being sold. 

During due diligence, the seller usually reviews the information in this form. The Seller’s Disclosure Form comprises yes or no questions, with an additional addendum that provides space to expand upon a question that is answered yes. 

The Seller’s Disclosure Form comprises four sections:

1. Business Conditions
2. Regulations
3. Other Considerations
4. General

Business Conditions

The business conditions section includes questions about the internal condition of the business, which has things like the business’s finances, dealings with employees and contractors, and the current relationship with the landlord.

Here are three examples of business conditions questions from the Seller’s Disclosure Form:

1. Are there any revenues, expenses, assets, or liabilities of the Business that are not clearly and accurately reflected in its financial statements? See the quality of earning report for an example.
2. Are any of the employees or independent contractors related to any of the business owners or one another? If yes, list them by name and describe the relationship.
3. Have you had or do you expect any disputes with the landlord or problems with the premises the Business occupies?

Regulations

The regulations section includes questions about licenses and permits, if any government agencies have filed or are currently investigating any violations and if any zoning or redevelopments could affect the business after the buyer purchases the business.

Here are three examples of regulations questions from the Seller’s Disclosure Form:

1. Is the business or its operations required to have any licenses or permits other than a local business license?
2. Are there any alleged violations filed or under investigation by the following authorities: Police, Health, Fire, Zoning, EPA, OSHA, or the IRS, which is a shortlist of authorities, and the actual form has additional agencies.
3. Are you aware of any pending zoning changes, redevelopment, or nearby contrition that might affect your business?

Other Considerations

The other considerations section includes other aspects of the business, like employee benefits, agreements with Unions or other employee organizations, and open litigation issues that will affect the business in the future.

Here are three examples of other considerations questions from the Seller’s Disclosure form:

• Does the business have an employee stock ownership plan?
• Does the business have a union or other employment agreements?
• Does the business have any pending or threatened litigation?

General

The general section includes any other considerations not listed in the previous three sections.

The three most answers that the general section tries to answer:

• Are there any facts or conditions that may adversely affect the operation of the business?
• Are there any facts or conditions that may change a buyer’s decision to purchase the business?
• Are there any facts or conditions that may affect the business’s selling price?

Mergers and Acquisitions: Representations and Warranties

In Mergers and Acquisitions (M&A), representations and warranties are critical because they disclose information about the business and guarantee this information is accurate with protection to the buyer should the representations prove inaccurate. 

Should the representations become inaccurate or the warranties become breached, the seller may gain the right to rescind the contract or the right to an indemnification claim. Find more details on how to protect your deal with a reps and warranty insurance in California.

Business sellers should hire M&A advisors to assist them with the entire process of selling their company. M&A advisors will take an active role in contracts, finances, and business valuation. M&A advisors charge final sale fees for their services.

Conclusion: Representations and Warranties

If you want to sell your business successfully in 2022, get an experienced professional to help you with the sell-side M&A process. 

Hiring an M&A advisor to discuss the representations and warranties of selling your business in California is wise. You will value and sell your business at the highest price while avoiding setbacks during disclosure.

If you have decided to value and then sell your lower middle market business now or within the next six to twelve months in California, click here to get started with this quick and simple form, or call Andrew Rogerson, Certified M&A Advisor, so we can understand your pain points better and prioritize your inquiry with Rogerson Business Services, RBS Advisors.

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