One of the areas that commonly causes problems in the M&A contract is financial information and related representation. Here are some key points to keep in mind as you gear up to tackle financial reps and warranties:
1. Make sure the buyer understands how your books and records are maintained early in the due diligence process. This eliminates surprises in the drafting of the contract.
2. Most contracts address working capital and how it is calculated. Be sure to discuss this early in the process, as it can easily become problematic if left to the last minute.
3. Be realistic and conservative with your budgets for the coming year. You do not want to be in the middle of negotiating a contract when the parties learn that you’re going to miss your budget for the year by a significant amount. You could be facing a change in the deal structure at the last minute.
4. Finally, work with your accounting advisor to understand where you may have financial exposure, either in the accuracy of your numbers or in liability. This will become useful information when negotiating reps and warranties.
These four tips culminate in one simple rule: you must be able to guarantee your past results.