Expense Agreement W&I: Understanding the Basics
In the world of mergers and acquisitions, expense agreement W&I (representations and warranties) is a critical component of the deal. It is designed to protect the buyer from unforeseen expenses that may arise due to inaccurate or misleading information provided by the seller. In this article, we will discuss the basics of the expense agreement W&I and how it works.
What is Expense Agreement W&I?
Expense agreement W&I is a legal agreement between the buyer and the seller of a company or business. It is a type of indemnity agreement that provides financial protection to the buyer in case of any losses incurred due to inaccuracies or omissions in the representations and warranties made by the seller. The expense agreement W&I is typically a separate agreement that is negotiated and executed alongside the purchase agreement.
How Does Expense Agreement W&I Work?
The expense agreement W&I works by providing financial protection to the buyer in case of any losses incurred due to inaccuracies or omissions in the representations and warranties made by the seller. These inaccuracies or omissions may include financial statements, tax returns, contracts, or other important documents that were not disclosed by the seller. The expense agreement W&I typically covers the costs associated with investigating and defending against any claims arising from such inaccuracies or omissions.
The expense agreement W&I is designed to allocate the risk of such losses between the buyer and the seller. The seller is typically responsible for any losses incurred due to inaccurate or misleading information provided by them, whereas the buyer is responsible for any losses incurred due to their own post-closing operations. The expense agreement W&I helps to ensure that the buyer does not end up with unexpected expenses due to the seller`s misrepresentations or omissions.
Key Factors to Consider in Expense Agreement W&I
When negotiating an expense agreement W&I, there are several key factors to consider. These include:
1. Coverage: The expense agreement W&I should specify which representations and warranties are covered under the agreement. It should also specify the duration of the coverage, which typically ranges from 12 to 24 months after the closing of the deal.
2. Thresholds: The expense agreement W&I should specify the minimum amount of losses required before the buyer can make a claim under the agreement. This is known as the ”threshold,” and it can be a fixed dollar amount or a percentage of the purchase price.
3. Caps: The expense agreement W&I should specify the maximum amount of losses that the seller is liable for under the agreement. This is known as the ”cap,” and it is typically a percentage of the purchase price.
4. Deductibles: The expense agreement W&I may include a deductible, which is a specified amount of losses that the buyer is responsible for before the seller becomes liable for any losses.
Conclusion
In conclusion, the expense agreement W&I is an important legal agreement that provides financial protection to the buyer in case of any losses incurred due to inaccuracies or omissions in the representations and warranties made by the seller. It allocates the risk of such losses between the buyer and the seller and helps to ensure a smooth and successful merger or acquisition. When negotiating an expense agreement W&I, it is important to consider the coverage, thresholds, caps, and deductibles to ensure that both parties are protected and the deal is fair for all parties involved.