When buying or selling a small business, disclosures and schedules to the purchase agreement play a crucial role in the transaction. Whether structured as an asset purchase or a stock purchase, the details provided in these schedules can significantly impact the rights and liabilities of both parties.
What Are Schedules and Why Do They Matter?
Schedules are attachments to the main purchase agreement that provide critical details about the business being sold. These schedules include information on assets, liabilities, intellectual property, contracts, litigation, employee matters, and other material aspects of the company. The accuracy and completeness of these disclosures are essential because they clarify exactly what the buyer is acquiring and what risks they may be assuming. Schedules and the disclosures in them are important to sellers in order to avoid claims of misrepresentation later. They also can serve as an opportunity to highlight how a business has been properly operated (if that is the case). A seller who can comprehensively fulfill their duty to complete the disclosures will typically do so because they have been properly operating the business. Sellers should anticipate what they are going to have to disclose before going to market with their business. That exercise may reveal issues that, if no resolved before going to market, a buyer would use to negotiate down the purchase price.
Buyer Expectations and the Role of Disclosure
Buyers typically want sellers to disclose all material matters related to the business. However, the degree of disclosure is largely dictated by the purchase agreement itself. Some agreements require “full disclosure” of all material facts, while others limit disclosure to matters that would be considered materially adverse to the business. Because of this, buyers need to negotiate strong disclosure obligations to ensure they get the information necessary to make an informed decision.
The Risk of Incomplete or Misleading Schedules
For sellers, failing to properly complete the schedules can lead to serious liability. Many purchase agreements contain representations and warranties from the seller confirming that the disclosures are accurate and complete. If a seller omits key information—whether intentionally or by oversight—they may be held liable for breaches of representation, leading to indemnification claims or even post-closing litigation. Sellers should take the time to thoroughly review and complete the schedules, working with legal and financial advisors to ensure accuracy. Schedules that are or look incomplete may cause loss of a sale opportunity or open the door for a buyer to (re)negotiate the purchase price down.
The Buyer’s Duty to Conduct Due Diligence
While sellers must be forthcoming, buyers also have a duty to conduct thorough due diligence. Buyers should take full advantage of their rights to request specific information in the schedules, rather than relying on generic disclosures. For example, instead of a broad disclosure regarding “material contracts,” a buyer should request a list of all contracts above a certain dollar threshold, contracts with key suppliers, or agreements that contain change-of-control provisions. By being specific, buyers can ensure they understand what they are purchasing and avoid surprises after closing.
Final Thoughts
The preparation and review of disclosure schedules are critical steps in any small business acquisition. Buyers must proactively negotiate strong disclosure obligations and conduct detailed due diligence, while sellers must ensure their schedules are accurate and complete to avoid post-closing liability. Proper handling of disclosures helps facilitate a smoother transaction and reduces the risk of disputes down the road.