Buying a Business? Don’t Overlook Representations and Warranties.
Leave a CommentThe Optimism Trap in Business Acquisition
Entrepreneurs tend to be very optimistic people as they see opportunities where others do not, especially when buying a business. This exuberance can lead some to avoid discussing the inherent risks in a prospective venture.
The Necessity of Due Diligence
Every potential acquisition requires one to investigate the business and identify the risks – lawyers call this due diligence. But even at the end of the due diligence there remain unknowns about the future.
Transferring Risk with Representations and Warranties
Representations and warranties form a key component of every well-drafted purchase agreement. Here is where a good lawyer can help by crafting specific representations and warranties about the business and specifics of the transaction that transfer risk about certain uncertainties from one party to the other and provide mechanisms for compensating one side for these risks.
The Danger of Generic Form Agreements
Using form agreement drafted for other situations can often make one feel comfortable about “papering” the deal but in fact sometimes do little to nothing to protect the purchaser from risks associated directly with the specific transaction.
Long agreements do not necessarily lead to agreements that will win the day in court should problems arise in the future. Spending some money with a lawyer prior to buying the business can save significant sums later when attempting to litigate a form contract.
Don’t let optimism cloud your judgment when making a major business investment. Protecting your future starts with a meticulously drafted purchase agreement tailored specifically to your transaction’s unique risks. Before you sign on the dotted line, partner with legal experts who specialize in due diligence and contract negotiation. Contact Protorae Law today to ensure your investment is secure.