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Representations and Schedules

When a buyer acquires an aerospace and defense company, they are purchasing a complex collection of assets, liabilities, relationships, contracts, agreements, obligations, commitments, understandings, entitlements, data, knowledge and more.

In a typical purchase agreement, the sellers will make various representations about what they are selling and provide detailed schedules listing the assets and liabilities of the business at the time of the sale (“Schedules”). In our most recent sale mandate, the client provided Schedules comprising hundreds of pages of documentation set forth in 37 separate sections, including supplier and customer contracts, intellectual property, encumbrances, legal proceedings, employment matters and much more.

Over the past 21 years, we have seen after-sale controversy (and litigation) most often in two very specific areas:

1. Key Customers. At times, a company may see a decline in revenue from a major customer following the sale of the business. When this happens, depending on the scale of the decline, the buyer may become disgruntled and initiate a lawsuit. The outcome of this type of dispute will usually be determined by the merits of the matter, as set forth in the seller’s representations in the purchase agreement and the associated schedules. Did the seller represent in the purchase agreement or disclose in a Schedule that there was a possibility of a decline in revenue from this key customer?

2. Inventory. Disputes in the value of inventory, including charges and reserves for obsolete and excess inventory, and the complexities of manufacturing cost accounting, can often lead to substantial post-sale disputes. Again, the merits of a buyer’s claim will usually determine their success in obtaining damages. What did the sellers represent in the purchase agreement regarding accounting policies, standard, systems, and procedures? Were any exceptions to generally accepted accounting principles (“GAAP”) clearly disclosed in the Schedules?

There is an important additional complexity to this important subject, and that is the availability of Representations and Warranties Insurance (RWI) in the middle market today. Historically, RWI was only available for M&A transactions over $250 million. But today, the RWI market has expanded; each of our deals over the past 18 months (all of which have been under $100 million) have been eligible for RWI. While this is a topic for another Deal Note®, it is important to clearly state here that availability of RWI changes the dynamics between sellers and buyers when it comes to negotiating the Representations and Schedules in a Purchase Agreement.

Have a great day everyone.

Kevin Gould
Managing Director, Aerospace