Auditing Early Equity Commitments Prior To Enterprise Sale
Auditing early equity commitments verifies informal share promises against corporate records, extinguishing unrecorded equity claims before enterprise sale closing.
representation and warranty
Meaning
Contractual assertions provide the factual foundation upon which a buyer or investor relies when evaluating a business. A representation and warranty functions as a double-sided promise where the seller confirms a state of affairs and agrees to pay for the damage if they are wrong.
Fact Disclosure
Sellers provide a list of exceptions to these general claims through a formal schedule. This process of qualifying a representation and warranty forces the founder to dig through old files to find any ongoing litigation or unpaid debts. Anything not listed in the disclosure schedule becomes a potential liability after the deal closes, making this one of the most labor-intensive parts of the closing process.
Liability Protection
Buyers use these clauses to shift the risk of unknown problems back to the seller. If a representation and warranty turns out to be false, the injured party can claim a refund of part of the purchase price. This mechanism protects the value of the investment against hidden defects.
Survival Period
These promises do not last forever. Most agreements set a time limit after which a claim for a breached representation and warranty can no longer be filed. Tax and environmental claims often have much longer windows because of the time it takes for such issues to surface in a government audit.