Condition and Sufficiency of Assets
What is the Condition and Sufficiency of Assets? In this section, the Seller provides information regarding the usefulness of the Purchased Assets. It is part of the Representations and Warranties of the Seller section.
The Representations and Warranties of Seller portion of the Agreement is used to save the Buyer time and money. Rather than require the Buyer to go through third parties to find certain information, the Seller provides the information and must reimburse the Buyer for any Losses it suffers if the information is false or misleading.
The Middle Ground: The Condition and Sufficiency of Assets representation asserts that each asset being transferred is in good operating condition and, other than the need for ordinary maintenance and non-material repairs, is suitable for use in the same way as it was being used in the Business prior to the transaction. It also states that the Purchased Assets are sufficient to conduct the Business in the same manner as it was conducted prior to the transaction.
Purpose: This representation gives the Buyer comfort that it is purchasing everything necessary to conduct the Business as previously conducted, and if that’s not the case the risk of loss will fall on the Seller. As the party with vastly superior knowledge on the issue, the Seller is in the best position to take on that risk, and allocating the risk this way also ensures that the Buyer receives the full value of the bargained-for assets.
Buyer Preference: Although the “Sufficiency of Assets” portion of the representation states that the Purchased Assets are sufficient to operate the business as previously conducted, as a safeguard the Buyer may want to add a representation that none of the Excluded Assets are material to operation of the Business.
Seller Preference: The Seller would prefer to limit this representation to the statement that the Purchased Assets are sufficient to operate the Business. Instead of attesting to the condition of the Purchased Assets, the Seller can allow the Buyer to inspect the property and assets. The Seller also wants to omit the representation regarding the Excluded Assets because it addresses the same concern as the Sufficiency of Assets representation.
Differences in a Stock Sale Transaction Structure: In a stock sale where the business being purchased is an independent entity as opposed to being part of a larger group, the Sufficiency of Assets representation is not necessary. However, if the stock purchase relates to a company that is part of a parent/subsidiary structure that shares the use of certain assets, the Sufficiency of Assets representation should be included in the Agreement.
