In the April, 2016 Recent Development, I referred to Representations and Warranties that should be included in the Sale and Purchase Agreement for the sale of a business. A Representation is an assertion of fact true on the date that the party makes the Representation. A Warranty is a promise of indemnity if the Representation is inaccurate.
Buyer: The Buyer wants comprehensive representations and warranties that are not qualified by knowledge or materiality.
Seller: The Seller wants to narrow the scope of its representations and warranties and qualify by:
- Materiality: qualifying the representation or warranty by materiality or what might cause a material adverse affect.
- Knowledge: limiting the representation or warranty to the knowledge of certain individuals of Seller.
- Disclosure: qualifying a representation or warranty with information disclosed on a disclosure schedule.
An example (there are many creative variations for each of these examples) of materiality, knowledge and disclosure follows.
Financial Statements. Seller has delivered to Buyer true, correct and complete copies of balance sheets and the related statements of income and of cash flows for the Company including its subsidiaries and partnerships for the period ended December 31, 2016 (including the related notes and schedules thereto) (the “Financial Statements”). To the best of Seller’s knowledge, each of the Financial Statements is complete and correct in all material respects, and has been prepared in accordance with generally accepted accounting principles applied on a consistent basis during the periods involved and presents fairly the assets, liabilities, financial position, results of operations and cash flow of the Company as at the dates and for the periods indicated.
Survival of Representations and Warranties. All Seller’s representations and warranties contained in this Agreement or any other agreement, schedule, certificate, instrument or other writing delivered by Buyer, Company or Seller in connection with this transaction shall survive for ( ) years after the Closing Date, unless otherwise expressly stated herein. If a party hereto determines that there has been a breach by any other party hereto of any such representation or warranty and notifies the breaching party in writing reasonably promptly after learning of such breach, such representation or warranty and liability therefor shall survive with respect to the specified breach until such breach has been resolved, but no party shall have any liability after such ( ) year period for any matters not specified in a writing delivered within such ( ) year period.
Absence of Certain Developments. Except as set forth on Schedule _____ hereto, since the date of the Financial Statements: (a) there has not been any material adverse change in the effect of the business or assets of the Company which would materially effect the business; (b) there has not been any damage, destruction or loss, whether or not covered by insurance, with respect to the assets of the Company; and (c) the Business of the Company has been conducted in ordinary course, consent with past practice.
Termination. This Agreement may be terminated and the transaction contemplated hereby may be abandoned at any time prior to the Closing Date as follows:
(a) By the Buyer, upon a breach of Seller, or failure of Seller to perform in any material respect (which breach or failure cannot be or has not been cured within thirty (30) days after the giving of notice of such breach or failure), any representation, warranty, covenant or agreement on the part of the Company.
(b) To Seller’s knowledge, the Company has complied with all Environmental Laws and the Company has not received any notice alleging any violation of an Environmental Laws with respect to Company or the Seller’s Business or the Included Assets. Any past noncompliance with Environmental Laws by or with respect to the Company or the Seller’s Business is identified by the Company on Schedule ____, and has been resolved without any pending, ongoing or future obligation, cost or liability. To Seller’s knowledge, there has been no Release of Hazardous Materials in violation of any Environmental Law on any property occupied or leased by the Company.
If you have any questions regarding how to best sell or buy a business, please contact Milton Cross at 215-241-8811.