The Nissenbaum Law Group routinely represents clients who purchase businesses based, in part, upon the representations and warranties made by the seller. This can include everything from reduced cashflow to the undisclosed potential for litigation. When a business is purchased, the buyer must rely, to one extent or another, on the fact that any problem that calls into question the underlying exigencies that have determined profitability are being fully and accurately disclosed. What happens if they are not?

There are different answers to that question based upon whether the parties are in the pre-closing or post-closing period.  Before the closing, depending upon the size of the transaction, the buyer may consider purchasing representations & warranties insurance as a means of mitigation and remediation of the potential damage. This is essentially an indemnity product that will provide financial compensation and/or representation in a corresponding lawsuit if the seller’s representations and warranties are not accurate (and the conditions of the policy for payout are met).

This also highlights the need for a buyer to conduct thorough due diligence in assessing the efficacy of the deal. While there is never complete protection from a downturn after the business is sold—such as those arising from a change in the law or regulations that concern licensing of the service or item the business markets or taxation of its revenue—a forensic accountant can perform a series of financial analyses in the due pre-closing diligence period that can begin to shed light on what sort of financial problems may arise down the road.

After the closing takes place, the buyer will need to assess the extent to which the original representations and warranties both (a) did not pan out and (b) were incorrect based upon more than an honest mistake. For example, were the financial disclosures complete? Was threatened litigation disclosed? Were anticipated changes in economic conditions that were well known to the seller not disclosed to the buyer? The list goes on.

As stated above, in such event, the buyer may decide to file a lawsuit to either reverse the transaction or recover damages (or both). This can involve counsel approved by the insurer, and if no insurance policy was taken out, counsel retained by the buyer with a focus in that area of practice.

Representation and Warranties Counsel with Nissenbaum Law Group

The Nissenbaum Law Group welcomes inquiries from purchasers of businesses who believe the representations and warranties upon which they relied misdirected them into buying a business they would not otherwise have acquired.