Representations and Warranties are essential elements of an Acquisition Agreement. They serve to allocate deal risk between Buyer and Seller.

1. A representation is a sellers statement of fact as of a moment in time intended to induce reliance by a second party.

An example of a representation of seller of a business to a potential buyer would be:

• The business owns its assets free and clear or any liens and encumbrance; or
• The assets of the business are in good condition.

This statement is made today (a moment in time) by the owner with the intention of inducing reliance (to induce the potential purchaser to rely).

2. A warranty is a promise by the seller that the statement of fact is true.

The promise's result is that the seller must pay damages to the recipient if the warranty is inaccurate and the inaccuracy causes damages. The measure of damages is a party's benefit of the bargain. A party may make a representation with respect to the past or present. However, it may not make a representation regarding the future for two reasons.

• First, in most instances, a court will not find a representation regarding the future valid. Courts' opinions generally state that representations are statements of fact and that there are no facts with respect to the future, only opinions.
• Second, a representation with respect to the future is, in reality, a disguised covenant and should be drafted as one.
  A covenant's benefit is that it extends the possibility of an additional remedy beyond damages: i.e. specific performance.

A seller may make a warranty regarding the past, present, or future. There is no limitation that the statement deals with a past or present fact. An example of a warranty with respect to the future is a promise that “all accounts receivable will be collected within 90 days of the closing."

When negotiating an acquisition agreement your attorney can help to make sure that the representations and warranties do not allocate an unreasonable amount of risk to your side of the transaction.

Future posts covering the critical legal elements of acquisition agreements will include Covenants, Rights and Conditions as well as Discretionary Authority, Declaration and Conditions.

This is the eighth in a series of eleven blogs on the selling process. For more information on S&K Transitional Services please contact info@stark-knoll.com.