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Representations & Warranties

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What are Representations & Warranties in M&A Transactions?

Representations and warranties (R&W) are statements made by the seller (and sometimes the buyer) in a merger or acquisition agreement to provide assurances about various aspects of the business being sold. These statements cover a wide range of topics, including financial condition, legal compliance, ownership of assets, and operational status. They serve to inform the buyer about the true state of the business and protect against potential risks or misrepresentations.

How Representations & Warranties Work

In an M&A transaction, representations and warranties are typically included in the purchase agreement. The seller makes assertions about the business, such as the accuracy of financial statements, the absence of undisclosed liabilities, and the validity of intellectual property rights. The buyer may also make representations and warranties about its ability to complete the transaction. These statements are usually subject to a survival period, during which the buyer can bring claims if the representations and warranties prove to be false or misleading.

Example

In a hypothetical M&A transaction, the seller might provide the following representations and warranties:

  • The financial statements provided are accurate and fairly represent the company's financial position.
  • The company has no undisclosed liabilities or pending legal actions.
  • All necessary permits and licenses for the business operations are valid and in good standing.
  • The company owns all the intellectual property necessary for its operations, free from any infringement claims.

If any of these representations and warranties are found to be untrue after the transaction closes, the buyer may seek indemnification from the seller for any resulting damages or losses.

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Related Terms

Adjusted EBITDA

Adjusted EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is a financial metric used to assess a company's operational performance. It modifies the standard EBITDA by excluding non-recurring, irregular, or non-cash expenses to provide a more accurate reflection of ongoing profitability.

Angel Investors

Angel investors are affluent individuals who provide capital to startups or early-stage companies in exchange for equity ownership or convertible debt. These investors often offer not only financial support but also valuable business expertise and mentorship.

Anti-Dilution Provision

An anti-dilution provision is a clause in an investment agreement that protects an investor from dilution of their ownership percentage in the event that new shares are issued at a price lower than the investor originally paid. It is commonly included in venture capital and private equity agreements.

Bootstrapping

Bootstrapping in business refers to starting and growing a company using personal finances or the company’s operating revenues, rather than relying on external funding or venture capital. Entrepreneurs use their own resources and reinvest profits from initial sales to fund further growth, emphasizing financial independence and careful cash flow management.

Bridge Loan

A bridge loan is a short-term loan used to meet immediate financing needs while waiting for more permanent funding. It serves as a temporary solution to bridge the gap between the need for funds and the availability of long-term financing.

Cap Table

A Cap Table, or Capitalization Table, is a detailed spreadsheet or document that outlines the equity ownership, types of shares, and ownership percentages of a company. It includes information on founders, investors, and employees, as well as the dilution of shares over time through various funding rounds and option grants.

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