Buying a San Diego Business? Four Must-Have Seller Representations and Warranties
When you are buying a San Diego business, there will be a sales contract that sets out all of the covenants and conditions of the sale. In the sales contract, your trusted and experienced California corporate attorney has ensured that the seller has made what are called “representations and warranties.” These are statements of fact such as, “I own this business that I am selling,” and the seller’s promise to defend the truth of the statements. If any of the representations and warranties are false, then the seller has committed fraud and litigation should ensue. These are often short-handed to “reps and warranties.” Here are four “must-have” reps and warranties.
San Diego Corporate Law: Seller is/was the Owner of What was Sold
As noted above, every seller of a business must provide a rep and warranty that he or she is the
owner of the business that is being sold. Likewise, almost every purchase of a business includes real or personal property of some sort. Examples include office equipment or sales inventory or intellectual property such as a trademarked logo. A well-drafted sales contract must provide that the seller reps and warrants that he or she is the owner of all the property being transferred as part of the deal. A good contract will also provide that there are no CLAIMS made by another that he or she or it owns some property being transferred: This is particularly important with intellectual property.
San Diego Corporate Law: Property is Free of Liens and Encumbrances
“Liens and encumbrances” is a legal concept that includes a large category of possible claims that might prevent a seller from transferring certain property. If you own a home, you likely have a mortgage. That is a common everyday example of a “lien and/or an encumbrance.” You signed a Financing Note to borrow money to allow you to buy the house and the bank said, “We need the ability to take your house — the mortgage — if you do not pay.” The mortgage is filed with the county recorder’s office creating the “lien.” The financing documents are, more generally, the “encumbrance.” Another common example is filed financing statements under the California Uniform Commercial Code. There are many types of liens and encumbrances.
A well-drafted sales contract must provide that the seller reps and warrants that all the property being transferred as part of the deal is free from liens and/or encumbrances. As the buyer, you do not want a bank — or anyone — coming along after the closing and saying: “Hey, that property was collateral for my Financing Note. I am taking the property because the seller did not pay.”
San Diego Corporate Law: No Litigation or Threatened Litigation
As many know, litigation is expensive. As a buyer, you do not want to get embroiled in some litigation involving the business you are buying.
A well-drafted sales contract must provide that the seller reps and warrants that there is no pending litigation — or THREATENED litigation — with respect to the business. This includes litigation over financing, customer complaints, non-payment, lease related, employee related, discrimination related, etc. If there is litigation, you, as the buyer, will need indemnification agreements from the seller or waivers from the parties to the litigation.
San Diego Corporate Law: No Governmental Action or Threatened Action
In the same manner, a well-drafted sales contract must provide that the seller reps and warrants that there is no pending governmental action — or THREATENED action — with respect to the business. Examples here might include governmental investigations or proceedings with respect to:
- Permit and licenses
- Environmental issues
- Labor or discrimination actions
- Failure to pay taxes
- And more
San Diego Corporate Law: Other Reps and Warrants Specific to the Transaction
Every business purchase is unique. Consequently, there will be other needed reps and warranties depending on the business you are buying. One might be that the seller reps and warrants that the property being purchased is “merchantable.” However, that might not be needed in every case. A talented and trusted corporate attorney is needed to help with the specifics of your purchase.
Buying a Business: Contact San Diego Corporate Law
For more information, contact Michael Leonard, Esq. of San Diego Corporate Law. Mr. Leonard has the experience to ensure that you have a well-drafted, purchase agreement that protects you and your legal rights. Mr. Leonard can also provide all the other legal services needed for the purchase or sale of a business and for mergers and acquisitions. Due diligence is complex and requires dedicated legal assistance. Contact Mr. Leonard by email or by calling (858) 483-9200.