Know and Grow the Value of Your Business: An Owner's Guide to Retiring Rich by Tim McDaniel

Author:Tim McDaniel [McDaniel, Tim]
Language: eng
Format: epub, pdf
Tags: Business & Economics, Entrepreneurship, Finance
ISBN: 9781430247852
Publisher: Apress

We have discussed most of these items. The exception is the representations, warranties, and indemnifications. It is important that you have an understanding of the purpose of these items in the APA. This is the area where the transaction attorneys earn their fee.

Representations and warranties are statements of fact and assurances made by both the buyer and the seller. Buyers want comprehensive representations and warranties to protect themselves against any problems or unforeseen issues. Sellers want to give as few representations and warranties as they can and limit the financial impact if there is a breach. Indemnification provides one party with a contractual remedy for recovering post-closing monetary damages arising from a breach of a representation, warranty, or any other contract issue.

In the deal that I opened the chapter with, the buyer asserted that there was a breach in the seller’s representation about the accuracy of the financial statements. The remedy they sought (indemnification) was the release of the escrow funds to their account and an additional payment by the seller to reduce the price paid. When my client refused these conditions, the buyer sued the seller.

Representations, warranties, and indemnification terms are the focus of a substantial amount of time and energy in negotiations. The only way to avoid this is to agree with all of the seller’s wishes in this area and have a ­significant ­portion of your proceeds from the sale held in escrow. However, this approach is not something I would recommend.

As a seller, your goal is to provide reasonable representations and warranties and limit your indemnification exposure. You can place caps on the damage amount, as well as time limits when damages can be claimed. Different areas of exposure may require different time limits. A financial statement representation may expire after one year, but an environmental representation may last much longer.

Land mine Don’t minimize the importance of the representations and warranty promises that you make in the APA and understanding the indemnification clause. Don’t sign the APA until you are confident that you will not end up in court post-closing.

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