This article focuses primarily on the importance and effect of warranties in the sale of business and assets, or of shares, in a company.
The buyer will usually ask the seller to give warranties about the current state of affairs of the business or the company (often referred to as the ‘target’).
These warranties will be drafted by the buyer’s solicitor in the purchase agreement and can involve extensive negotiation between the parties since the buyer will want to minimise any risks associated with the target, whilst the seller will try to limit their liabilities.
What are warranties on sale of business?
Warranties are statements of fact which the seller gives to the buyer in respect of various aspects of the business.
If the buyer can show a financial loss as a result of a breach of warranty, they may be entitled to bring a claim against the seller for that loss.
Why are warranties necessary?
A sensible buyer will carry out due diligence on the target, (as was covered in a previous article here) to obtain as much information as possible so that they can identify any areas of concern.
However, due diligence often gets neglected or is not undertaken thoroughly due to time or cost constraints. Therefore, it is common for buyers to ask for warranties to be included within the sale contract which they can rely on.
Including warranties in the contract will often encourage the seller to disclose any matters which the buyer ought to be made aware of, before the transaction completes.
What should warranties cover in business sales?
Warranties should be tailored to the type of the business or the company being purchased, but will also typically cover areas such as:
- The financial position of the target and the accounts,
- Any past or ongoing litigation or disputes,
- The contracts, employees and the business’ IT systems and intellectual property.
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