Tax Representation and Warranties in Business AcquisitionsTax Professionals Resource
July 5, 2012 — 1,346 views
A business acquisition involves a company acquiring another competitive or complementary business to build on its strengths. Inc. magazine explains that there are key concepts to consider with pursuing an acquisition including growth opportunity in the target company, purchase price and financing terms.
When an organization determines that a business acquisition is a rational step toward growth and overall company success, an acquisition contract or agreement is developed that contains a series of statements including statements that describe tax representation and warranties.
Taxation and acquisitions go hand in hand because the representations and warranties provide the information a buyer needs about the seller's company required to make a well-informed decision. They should cover the protective rights of the buyer, meaning everything the buyer should know must be revealed.
Furthermore, if the purchasing company discovers facts that are not covered on the representations and warranties, it has the right to renegotiate before closing. This is one of two main functions of representations and warranties, forming a basis for liability if the facts don't match up with what the buyer is expecting. Finally, the other main function of representations and warranties setting the conditions for closing the acquisition.