Critically, the representations and warranties section of the purchase agreement will include representations whose truth or falsehood can be determined during due diligence. These will include a comprehensive list of facts about the business, especially regarding finances. If any of these is determined to be materially false, where “materially” would be precisely defined, then the winning bidder would have the right to call off the deal and collect a breakup fee from the company. The size of the breakup fee would vary per representation and be proportionate to the extent to which the company should have known the veracity of the representation. A breakup fee sounds painful, but its presence will make buyers willing to place higher bids.
The contract will determine whether representations were materially false using expert determination, as explained in the next section.
We have developed a 12-page expert determination agreement by working with several attorneys and business owners. If incorporated into any contract, this agreement provides a legally binding answer to any objective or subjective question. It can thereby resolve most predictable disputes. It resolves disputes at low cost, at relatively fast speed, with minimal vulnerability to the answer being overturned by litigation, and with a high level of fairness and justness.
The expert determination agreement is the linchpin: It is the deal’s source of integrity. It enables each party to believe that the other is acting in good faith and will keep their promises.