Confidence Slowly Rising for Small Business Owners

Acquirers would most likely want all of the following reps and warranties included in the final contract:

Assets

Acquirers want to make sure that they are getting full title to all of the assets included in the sale with emphasis on intellectual property and patents. Acquirers also want assurances that the machinery and equipment are in good working order. Also, all assets are to be delivered free and clear of all encumbrances unless otherwise specified.

Financial Statements

A closing audit is important to verify the authenticity and actual amounts of all of the items included in the sale with special emphasis on inventory, receivables, cash (if included) and payables.

Taxes

It is critical to verify any tax liabilities if it is a stock purchase. In the case of an asset sale, the new owner wants to make sure there are no liens on assets due to unpaid taxes, or any other lien against the assets being purchased.

Pending and Potential Litigation

This is obviously a big issue with a consumer product due to our litigious society. Acquirers don't want to be responsible for product liability created under the seller's ownership. However, sellers will most likely want a time period and/or cap on their total responsibility.

Environmental Issues

This is a stumbling block in many transactions. Just because the acquirer leases the premises does not mean that he or she would not be liable for environmental issues. This is especially true in transactions in which the stock is transferred and the lease is in the corporate name. The acquirer should make sure that the seller remains liable for any environmental problems that developed while the seller owned the business.

Employee Relations

Even if the sale is one of assets, so that the new owner may not be contractually liable for employee agreements, these agreements should be honored by the new owner. This is, of course, assuming the new owner wants to retain the employee(s) under contract. Even if an employee has certain privileges or benefits that are not contractual, a new owner might want to continue them in the interest of good employee relations.

Authorization

Sellers should make sure that they have the complete authorization of the stockholders and/or the Board of Directors to sell the company. Sellers will be expected to disclose all liabilities, contracts, stock options, etc. They will also be expected to ensure that wages, taxes and all insurances are current and all employee agreements are disclosed.

An all-important issue is which representations and warranties survive the closing and which ones cease at the closing.