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Step by Step Guide to Selling your Business. Warranties & Indemnities: What are they?

A buyer looking to buy your business will want to ensure they are getting what they believe they are paying for without nasty surprises after the sale has completed (for example a claim from an ex employee).

The buyer’s solicitor may well advise the buyer that a range of warranties and indemnities should be included in the business sale contract.

As seller of the business, if you give a warranty, it means you will be giving a contractual pledge that a given state of affairs exists.  If you subsequently breach the warranty the buyer could sue for loss if it affects the value of the business purchased.

Indemnities are more onerous as they are a pledge to reimburse the buyer for the loss the buyer suffers regardless of whether it has a negative impact on the value of the business purchased.

For example, you provide a warranty that there are no outstanding claims relating to the sale of any defective products.  However, following the sale it transpires that one of your employees failed to inform you that there was such a claim outstanding when the business was sold.  Following completion of the sale the buyer has to deal with the claim for defective products even though you had warranted that no such claim existed.  The buyer might therefore have a claim against you for any loss he suffers.  However, if the buyer cannot demonstrate that as a result of the  customer claim the value of the business acquired has diminished then there would be little point in making a claim against you.

If however, you had indemnified the buyer against any claim for defective products then the buyer can claim against you without having to prove that there was any loss caused by the customer claim for the defective product.  The buyer would claim a straight reimbursement from you for the entire financial loss suffered by the business as a result of the customer making the defective product claim.

From your perspective – as seller of the business – warranties proportionate to the transaction might be reasonable but if you have given full disclosure (see Due Diligence: What is it? Step 6 of this Guide) you will have a stronger argument to resist giving anything other than basic warranties for example, a warranty confirming that there are no employee claims.

Agree with the buyer that you will give full disclosure (under the guidance of your solicitor) and limited warranties covering only those issues which are of particular concern but emphasise at the heads of terms stage (see Step 4 of this Guide) that a light touch should be taken.

Reams of warranties, which your solicitor will have to negotiate, can slow the sale process, increase costs and can even scupper the deal when the parties get into protracted arguments over the extent of warranties and in turn the wording and scope of each warranty.

We are happy to give free, initial advice with no obligation. Please feel free to call.

 

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