What are warranties and why are they important?

Following on from our article on Due Diligence, after the investigations have been carried out the parties should hopefully now understand exactly what is being bought and sold. In order to ensure that the parties are fully protected, the contract selling the business will need to include warranties.

Warranties are promises given by the seller to the buyer. These will include promises that the seller has not withheld any information about the business when specifically asked by the buyer and there is nothing lurking in the background to catch the buyer unawares.

Buyer’s concerns

The buyer will want to ensure the warranties are comprehensive as they will want to be able to sue the seller if any warranties that are given are untrue. In particular, where the buyer is buying a company’s shares (rather than just its assets) the buyer takes the company ‘warts and all’ and this includes any issues the buyer is unaware of at the time.

Seller’s concerns

By contrast, a seller will want to limit any warranties to ensure they do not trip up and relate to matters the seller is not aware of. If there is a potential claim against the company but the seller does not know about it at the time of the sale then the seller will want to ensure that they are not going to be caught by the warranties. The seller will also want to limit any liability so that the buyer has to bring any claims under the warranties within a particular period and that any liability is capped to a certain amount.

Common warranties

The most common warranties will be:

  • The seller is the owner of the assets or shares and is entitled to sell them to the buyer
  • There are no ongoing or potential disputes (or if there are these have been disclosed)
  • Details (and copies) of all contracts have been disclosed to the buyer
  • Details (and evidence) of all debts and borrowing have been disclosed to the buyer
  • The latest accounts of the business are true and accurate
  • The business owns the assets which have been disclosed to the buyer

There will also be a tax warranty relating to the tax position of the business.

It is very easy to get tripped up by warranties and legal advice should be taken at an early stage.

If you would like to find out more about buying or selling a business please contact Louise at louise@ervinhall.co.uk and she will be happy to help.