KEN KIRSCHENBAUM, ESQ
ALARM - SECURITY INDUSTRY LEGAL EMAIL NEWSLETTER / THE ALARM EXCHANGE
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Sellers representations re the contracts Part 4
May 5 2025
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Sellers representations re the contracts Part 4
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Expect the agreement effectuating the buy sell transaction to discuss the contracts. Your contracts remain the most important asset you have and the single most important assets you will be selling, or buying. Some buy sell agreements like to define the contracts involved in the transaction by referring to them as "Qualified Contracts" or "Qualified Accounts". What makes them qualified?
There are a number if criteria an account must meet in order to be considered part of the deal, a Qualified Account. This article focuses on just one of those criteria, the agreement between the selling alarm company and the subscribers.
The buy sell agreement will set certain criteria for what accounts the buyer wants included in the deal, and perhaps more importantly, what accounts are to be excluded from the deal. The seller would like to unload all its accounts, the good, bad and ugly, but why would a buyer be interested in the ones that are less what the buyer wants. There are certain standard issues that we see deal to deal. Accounts in arrears are usually excluded from the deal and the tolerable delinquency period seems to be 90 days.
The buy sell agreement is going to require both parties to make various representations and warranties. Some are reasonable and we see them in all the deals; some are burdensome and unnecessary, cause delay and run up the legal fees; others are dangerous for the party being asked to make the representation.
One such demand for representation is the buyer requiring the seller to represent and warrant that all subscriber contracts have specific provisions. These typically include the protective provisions found in the Kirschenbaum Contracts TM [not many of the "alarm lawyers" can bring themselves to require a "Kirschenbaum Contract" but some come close enough by description. Besides the protective provisions the representations may also require term of contract, time left, renewal issues, compliance with cancellation notices, nature of execution, and others ideas. One must ask, why is buyer demanding these representations from the seller and what happens if some or more contracts do not meet the criteria?
Let's start with the representations required. Wasn't the buyer offered the opportunity to perform due diligence? Weren't the contracts made available for review and study? Didn't the buyer satisfy itself regarding the most important asset it was buying before it made its offer and committed to buy the accounts? When the parties arrive at the closing and exchange the purchase price does the seller expect the buyer to then start conducting its due diligence in earnest, weeding out the accounts that may not meet the representations seller makes in the sale agreement? Another way to look at this is, who is going to bear the burden of risk if a contract is included at time of sale that shouldn't have been because it doesn't meet all the contract terms representations? The comical thing is that the lawyers demanding the representations never spell out what the provision needs to look like. For example, they don't require the wording for the limitation of liability clause or the indemnity clause, they would ask for a contract with those paragraph headings. This is something that the buyer should have reviewed and resolved before the closing during due diligence.
it's one thing for the buyer to say I am going to buy the list of accounts identified in Schedule A, and later find accounts not on the list that should be on the list. It's another thing to say I am buying accounts on the list unless I find out later, after the closing,, that they shouldn't be on the list because I don't like the wording of the contract. The same attorneys asking for these ridicules representations usually also want the seller to represent that all the contracts are enforceable. That's an interesting representation by a guy who owns an alarm company, that he can be liable if the contract isn't enforceable, so that now the seller is responsible for every judge who may be faced with the contract, forgetting that often the facts will play a role in whether a judge enforces a contract.
What's the purpose of these representations if not to permit the buyer a second chance at due diligence. Unfortunately for the seller, the representations will be used for after the fact, after the closing, to claw back the purchase price and sometimes more than the purchase price.
You cannot put yourself in such a bind that you have to submit to these stupid and unreasonable contract demands; you need to know when you have to say, "no way", we can't do this deal this way. When you close you need to know you are done except for:
1. the guarantee you have given for the accounts
2. basic representations, which are guarantees, called "fundamental representations" which are that you own the assets, that they are free and clear and that you're authorized to sell the assets to the buyer; that you don't have debt, tax or trade debt unless disclosed and that you haven't done anything to diminish the value of the contracts, such as cancel them, forge them or alter them, or commit some other willful, malicious act.
But guarantee that the contract has proper wording or will be enforced? I don't think so unless we are talking about a handful of contracts that can be reviewed at the closing if anyone wanted to. The buy sell transaction doesn't have to be a contentious situation creating traps for one of the parties. If you want to be exposed to having to repay all the purchase price and maybe more than let yourself be pushed into a transaction that makes unreasonable demands and shifts all of the risk on you as seller. Buyers, if you're in the market to screw the seller, K&K won't be assisting you; we insist on sensible deals fair to both sides.
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Ken Kirschenbaum,Esq
Kirschenbaum & Kirschenbaum PC
Attorneys at Law
200 Garden City Plaza
Garden City, NY 11530
516 747 6700 x 301
ken@kirschenbaumesq.com
www.KirschenbaumEsq.com
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