Last week’s blog discussed when an acquisition should be structured as a stock purchase. One of the key components of the acquisition agreement is the section containing the seller’s representations and warranties about the business. Certain representations and warranties have greater relevance and should be more carefully addressed in a stock purchase, as opposed to an asset purchase, including the following:
Working Capital. Unless the purchaser will be infusing new money for working capital, the purchaser will expect a certain level of working capital to exist on the closing date. To assure this, there need to be representations that no withdrawals or distributions above an accepted amount have been made to the owner within a certain period prior to closing;
Insurance. A purchaser wants to know that the seller had adequate insurance in place that will cover any losses pertaining to pre-closing actions or conduct. An insurance representation should be inserted which will serve to verify that the seller did have such insurance in place or if not, alert the purchaser to a potential risk; and
Ownership. In a stock purchase, the purchaser is usually acquiring 100% of the shares of stock in the selling company. It is therefore important that the seller represents that he or she owns all shares of stock and that no third party has any option or right to acquire stock.
The above representations and warranties are part of an overall “security blanket” that a purchaser can create in a stock purchase.
ABOUT GLENN D. SOLOMON
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Glenn D. Solomon is a principal at Offit Kurman and has provided counsel to businesses and business owners for more than twenty-five years. He has extensive experience in the purchase and sale of businesses, structuring ownership agreements, and advising companies in financial distress.
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