Break The Code

Trust Me

If prevarication is the disease, representations and warranties are the cure. Make the other side reduce to black and white what it promises to be true. These types of warranties are a second cousin to familiar consumer warranties for parts and labor, only here, the stakes are higher. Anyone who makes a phony representation or warranty may get nailed for fraud, as well as the losses suffered by the other side.

Reps and warranties (R&Ws) must be custom-designed for each deal. The more complex the transaction, the more exhaustive the R&Ws and extensive the negotiations. For example, even your garden-variety corporate deal will include a rather comprehensive list of R&Ws: accuracy of financial statements, title to assets, insurance policies, customer lists, payment of taxes, proper corporate formation and operation, stock and good standing of each party, zoning, inventory, patents, accounts receivable, lawsuits, trademarks.

But don't let your guard down just because you have R&Ws swearing everything's OK. In the real world, the other side's dishonesty or negligence will become your problem . . . and a lawsuit is a time-consuming, aggravating and expensive last resort. Even the tightest R&Ws don't replace checking out who you're doing business with, buying appropriate insurance policies and structuring your exchanges to minimize your downside.

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