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Understanding warranties and indemnities when selling a business

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What warranties and indemnities must I give to my buyer?

Warranties and indemnities protect a business purchaser from financial loss when the information their buying decision was based upon is shown to be unreliable. They’re legal documents that form an important part of the final sale agreement.

When a purchaser buys a company they take on the existing liabilities, but also contingent liabilities that they may not necessarily be fully aware of or understand the full implications regarding future risks. 

Although warranties and indemnities both provide reassurance to serious buyers and can smooth a business sale, it’s also important for the seller to understand their future liability and limit it where appropriate.

Selling My Business can provide professional guidance on warranties and indemnities when selling a business, and ensure that all interests are protected.

What are warranties in a business sale?

A warranty is a written statement that supports claims made about the business. It provides reassurance to the buyer that the information provided to them is reliable. If it’s later found to be unreliable or inaccurate, a warranty allows the purchaser to claim damages.

Warranties are legally binding and can cover a range of business areas. If a claim is upheld by the court, the aim is to place the buyer in the financial position they would have enjoyed if the information provided had been reliable.

Examples of business areas covered by warranties include:

  • Intellectual property
  • Accounting and financial issues
  • Employee matters
  • Pensions
  • Tax issues
  • Machinery and equipment
  • Legal disputes
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Indemnities when selling a business

Indemnities specify issues that are already known by the buyer and seller, which could cause financial loss to the business in the future. They differ from warranties in that they protect against definitive situations rather than simply supporting claims made by the seller.

Indemnities allow for compensation to be paid for losses arising from the issue specified, without the need for the buyer to make a claim. Pre-identifying problems that could lead to financial loss for the purchaser, and then obtaining an indemnity is a key part of the process.

Examples of indemnities include:

  • Existing employee issues, such as tribunals or other disciplinary matters
  • Product liability cases
  • Tax liabilities
  • Legal disputes with customers

Negotiating warranties and indemnities

Business purchasers will naturally want to protect themselves from future and unknown risks that could ultimately reduce the value of the company they’ve bought, or negatively affect the expected turnover/profit levels.

On the other hand, sellers need to negotiate warranties and indemnities to limit their liability in the future. They can then move on with some reassurance that potential compensation or the duration of their legal obligation to the purchaser will be capped. 

It’s crucial to obtain professional input when negotiating warranties and indemnities. This ensures that all liabilities are clear-cut for both parties and there are no ‘hidden’ legal obligations that could surface in the future.

When are warranties and indemnities negotiated?

An important part of the selling process is the due diligence phase when the buyer and their professional representatives conduct thorough checks on the information provided to them. If concerns are raised or specific issues emerge, they’ll aim to protect the investment through warranties and indemnities.

These are negotiated once due diligence has been completed, and before signing the final sale agreement. The Selling My Business team has extensive experience in negotiating warranties and indemnities, and will ensure that interests are protected as necessary.

For more information about warranties and indemnities during a business sale, please get in touch with our expert team at Selling My Business.

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