Reps & Warranties: Financial Statements
Essential Question:
Do your financial statements accurately represent the business?
In Brief:
Arguably the most important representation – it’s why we’re here.
Category: Continued Diligence & Fact-Finding
What is it?
First, this representation is a definition of what constitutes a financial statement for this company and this deal. Then, it’s about assuring that they were prepared on a consistent basis and that what you’ve provided is actually based on the books and records of the company while fairly representing what they’re supposed to.
When does it matter?
This rep matters most when there are any inaccuracies in the Financial Statements – and whether that inaccuracy is intentional or unintentional. Unintentional inaccuracies that constitute a breach of this representation are certainly undesirable, but they generally have no more than a moderate impact on the value of the deal (otherwise, they would’ve been flagged internally by the Seller). Intentional inaccuracies tend to be larger, thereby influencing deal value to a greater degree. The more troubling result of intentional inaccuracies is that they decimate trust between the parties, and at that point most buyers will walk away from the deal. Thankfully, unintentional inaccuracies are the much more common variety.
What to look out for?
Just be as thorough and transparent as possible to ensure the financial info was prepared in a consistent manner, that it’s fairly represented, and that it accurately reflects the condition of the company.
