Business, Legal & Accounting Glossary
Reps and Warranties refer to the statements of facts, opinions, and estimates investors ask companies and managements to put into writing as a condition of funding. These representations (reps) and warranties usually appear in the financing agreement.
Some of the more common ones are:
Other reps regarding cost estimates, market research conclusions, and revenue projections may also be requested.
Reps and warranties should be made carefully. If they are inaccurate, they should be corrected. If they are overbroad, they should be narrowed. Otherwise, they may create a default that releases the investor from his obligations and subjects management and the company to liability.
Transitional Service Agreement
Seller Friendly Purchase Agreement
Stock Purchase Agreement
Purchase and Sale Agreement
Consideration Shares
Due Diligence
Valuation
Seller Indemnity
Buyer Indemnity
The term “reps and warranties” refers to the statements made by a buyer and/or seller in a purchase and sale agreement. Both parties rely on the other to give an accurate accounting of all pertinent information and supporting documentation necessary to complete the transaction.
The seller’s claims are typically related to the information upon which the buyer is basing his or her valuation of the business. As a result, the seller is not only required to state that all financial information provided is genuine and accurate, but also to provide supporting documentation such as financial statements, customer and supplier listings, copies of any significant contracts, and equipment listings. This information is included in the purchase and sale agreement’s schedules and may be referenced to post-transaction to determine that what was successfully acquired exists.
Generally, the buyer’s representations pertain to the method of payment utilised to complete the transaction. If the buyer’s stock is included as consideration for the transaction, the buyer must declare that it is legally permitted to offer the stock. Additionally, the buyer must supply the seller with a shareholder agreement that states that the stock is being offered free and clear of any encumbrances.
Reps and warranties serve as the foundation for buyers’ due diligence. They essentially let the seller disclose any potential difficulties with the business prior to completing the acquisition. For instance, if a contract with a large customer included in the valuation is set to expire, the seller is required to disclose the expiration as part of its representations and warranties. Not reporting a relevant circumstance such as this could prevent a deal from completing or result in a post-transaction legal challenge.
To protect against financial loss as a result of either party failing to represent something material, buy and sale agreements typically include an indemnification clause. This provision protects the other party against an omitted or overlooked representation that could result in a financial loss post-transaction. As a result, it is critical that both parties disclose all relevant facts upfront in their representations and warranties in order to avoid costly legal conflicts over the enforcement of indemnity clauses.
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Definitions for Reps And Warranties are sourced/syndicated and enhanced from:
This glossary post was last updated: 21st January, 2022 | 0 Views.