Bring-Down Certificates: What to Know Before Closing a Deal

Navigating the world of business transactions can, at times, feel overwhelming. When selling, one of the crucial documents you may come across is a bring-down certificate. This article will guide you as a seller through the essentials of a bring-down certificate and why it's critical for your transaction.

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What's a Bring-Down Certificate?

A Bring-Down Certificate is a document that reaffirms the validity of representations and warranties originally given at closing under the purchase and sale agreement, confirming these assertions remain true at a later date. Essentially, the document attests to a snapshot of the company’s condition at a specific time - typically at closing.

In other words, a bring-down certificate is proof that the company's value and conditions haven't changed since closing. It’s a way to prove that you've fulfilled your end of the deal, and it should be issued in advance of any sale or transfer.

Why a Bring-Down Certificate Is Crucial for Sellers

As a seller, it is crucial to understand the role of a bring-down certificate in your business transaction. Here are few reasons why:

Legal Protection

A bring-down certificate provides you with legal protection by ensuring that the buyer cannot later claim the company’s condition was misrepresented at closing.

This means that you have a way to prove that the company is in good standing. For example, if your buyer claims that he wasn't told about some pending legal issues and tries to get out of the contract, you can use your bring-down certificate as proof that he was informed about these matters at closing.

Ensuring Accuracy of Representations and Warranties

The certificate confirms assertions from your original purchase and sale agreement about the company's financial condition, operations, legal standing, and other pertinent factors remain true.

Building Trust with Buyers

A bring-down certificate helps build trust between you (the seller) and the buyer by providing transparent and easy-to-understand information about the company's situation.

How to Prepare a Bring-Down Certificate

An expertly curated bring-down certificate can save you future headaches. Here's a step-by-step guide on how to prepare one.

Step 1: Start by Reviewing Your Purchase and Sale Agreement

The purchase and sale agreement is the foundation for your bring-down certificate. Therefore, the first step is to review the agreement carefully, focusing on the representations and warranties made by you (the seller). Understand which assertions you need to reaffirm in the certificate and make note of any specific dates or deadlines for updating or submitting the document.

Step 2: Compile the Relevant Information

Now that you're familiar with the representations and warranties from the purchase agreement, it's time to collect the information necessary to reaffirm them. This data may include:

• Company financials, such as balance sheet, income statements, and cash flow statements

• Compliance documents demonstrating adherence to all relevant laws and regulations

• Contracts with third parties, like suppliers, clients, and partners

• Litigation records, highlighting any ongoing or past legal disputes

• Intellectual property documentation, like patents, trademarks, and copyrights

• Employee management records, including employment agreements

Basically any information that would help to prove that the company has been operating as usual during the sale process.

Step 3: Verify the Information

Once you've gathered all the relevant data, verify its accuracy. Cross-check the documents with the leadership team, other key executives, and/or employees closely involved in the transaction process. The bring-down certificate will only hold weight if it is truthful and accurate. A few things you can do to verify the information include:

Interviewing key personnel: Interview the leadership team and other key executives to get a better idea of what's been happening with the company. You may also want to interview a few employees, especially those who are in charge of certain departments or tasks that are vital for operations.

Reviewing financial statements and reports: Make sure that all figures on financial documents add up; if not, this could be a sign that something is amiss with the bring-down certificate.

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Step 4: Draft the Bring-Down Certificate

Now that you've compiled and verified the needed information, it's time to draft the certificate. Here's a simple format to follow:

1. Certificate Title: Clearly label it as "Bring-Down Certificate" followed by the Seller's name or company name.

2. Date of Submission: Indicate the date the certificate is prepared and submitted.

3. References to Agreement: Reference the purchase and sale agreement and its date.

4. Reaffirmed Representations and Warranties: List each representation and warranty, and explicitly state that each remains true and accurate as of the submission date. If required, provide updated information or documentation related to those representations and warranties. Remember, representations are statements of fact, while warranties are promises that certain conditions must be met. For example, if a building has no outstanding code violations and is in compliance with local zoning ordinances, then those are representations.

5. Acknowledgments: Include any acknowledgment by the company's leadership, such as acknowledgement of receipt of acquirer's consent in case of change of control or any other required approvals. This is important because it indicates that the company's leadership has been made aware of all the implications of the acquisition and are willing to go on record with their acknowledgement.

6. Signatures: Obtain signatures from authorized company representatives or officers, confirming the certificate's accuracy and completeness.

Step 5: Finalize and Submit the Certificate

Make any necessary changes based on your legal counsel's review. Then, finalize the document, print it or save it as a PDF file, and submit it to the buyer. Ensure the buyer receives the bring-down certificate in a timely manner as specified by your purchase agreement or as otherwise agreed upon.

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Common Mistakes and How to Avoid Them

No one likes making mistakes, especially when it involves substantial financial investment and legal implications. Here are some common pitfalls sellers make and how you can avoid them:

Incomplete Information

Ensure your certificate captures all relevant information about your company's condition at the time of the agreement and at closing. Leaving out vital information can lead to legal issues and undermine trust with the buyer. A good example is the case of a buyer who bought a business that was in the middle of litigation. The seller failed to disclose this information, which led to costly legal issues for both parties.

Failure to Update the Document

The bring-down certificate is not a stand-alone document. Update it regularly to reflect any changes in the condition of the company. Failure to do so can lead to legal issues, particularly if the buyer finds that the company has deteriorated since closing. For example, if you neglect to update the bring-down certificate after selling off some of your assets or incurring debts, you could be held accountable for those obligations in the future.

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Failure to Disclose Information

Buyers can and will hold you accountable for any information that is not included in the bring-down certificate. For example, if you fail to disclose that there are outstanding lawsuits against your company, it will be on you if those plaintiffs decide to sue the buyer.

If you think this won’t happen, think again. Lawsuits are expensive and time-consuming, which is why buyers will often sue sellers for any information they think may have been misrepresented.

In fact, one of the most common reasons why buyers sue sellers is because they discover that there are outstanding lawsuits against the company. If you are sued by a buyer after selling your business, it’s likely that your insurance will not cover any damages.

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Expert Tips for Creating a Strong Bring-Down Certificate

Whether your business is headlong into a deal or foreseeing one soon, these expert tips can come in handy to create an effective Bring-Down certificate.

Proper Documentation

Maintain records of any significant developments that occur during the deal making process, and reflect them in your certificate where applicable. For example, if you have a signed letter of intent, make sure that it is included in your certificate. Similarly, if there are any changes or developments in the agreement, such as an increase in price or a reduction in services provided, they should also be reflected.

Periodic Review and Updates

Update your certificate periodically to reflect accurate, current information about the company's condition. A common example is to update the certificate when a company is acquired by another company, or splits up into two parts. A more recent example is the Facebook initial public offering (IPO) in 2012, which caused many investors to reevaluate their investment strategies.

Certification of Sufficient Funds or Other Security

The Bring-Down Certificate should also contain a certification that the buyer has sufficient funds to complete the purchase, or that he is in possession of other adequate security for payment. If you are using a promissory note in lieu of cash, attach to the certificate a copy of the promissory note.

Navigating the legal complexities of a business deal doesn't have to be a daunting task. With resources like this guide, you're well prepared to understand the nuances of a bring-down certificate in the selling process.

As you continue to grow your business, remember that smart business owners take advantage of resources that can save time and reduce potential liabilities, including professional contract templates for critical documents like a bring-down certificate. If you don't know where to start, click here to learn more about our professionally crafted Bring-Down Certificate for Sellers!

Remember, the best time to get it right is always the first time. With a well-crafted bring-down certificate, you're one step closer to closing your deal – and being equipped to do it right.

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