Buying a company? How warranties can protect you

Acquiring a company is a significant investment fraught with potential risks. In England and Wales, warranties play a crucial role in protecting buyers from unforeseen liabilities and risks during company acquisitions. Brad Stewart, an associate solicitor in our corporate team explores the importance of warranties when buying a company and how they can safeguard your investment.

Understanding warranties

Warranties in company acquisitions are assurances provided by the seller regarding the state of the business. They cover aspects such as financial health, legal compliance, assets, liabilities, and operations. Detailed in the sale and purchase agreement, any breach of these warranties resulting in a loss may allow the buyer to claim damages from the seller.

Types of warranties

1. Financial warranties: These ensure the accuracy of financial statements, the absence of undisclosed liabilities, and the overall financial health of the company.
2. Operational warranties: These cover the company’s day-to-day operations, including contracts, asset conditions, and undisclosed liabilities.
3. Legal warranties: These relate to compliance with laws and regulations, the validity of licenses and permits, and the status of legal disputes.
4. Tax warranties: These assurances pertain to the company’s tax affairs, including the accuracy of tax returns and the absence of tax disputes.
5. Environmental warranties: These address compliance with environmental laws and the absence of environmental liabilities.

Importance of warranties when buying a company

Mitigating risks

Warranties mitigate risks by providing assurance that the seller’s information is accurate and complete. In the event of a breach, the buyer can seek damages for any losses, thus protecting their investment.

Enhancing due diligence

Warranties complement the due diligence process by encouraging full disclosure from the seller. Negotiating warranties often uncovers and resolves potential issues before the transaction completes, helping the buyer make an informed decision.

Legal recourse

If warranties are breached and losses suffered, the buyer has legal recourse to claim damages, which is crucial for recovering losses resulting from significant financial or operational disruptions.

Facilitating negotiations

Warranties facilitate smoother negotiations by addressing potential concerns upfront and building trust between the buyer and the seller.

Negotiating warranties

When negotiating warranties, consider the following:

1. Scope and specificity: Tailor warranties to the unique aspects of the business being acquired. Generic warranties may not provide adequate protection on their own.
2. Duration and limitations: Define the duration of warranties and any limitations on claims. Warranties are typically effective for a specified period post-transaction.
3. Disclosure: Ensure the seller provides comprehensive disclosures against the warranties to prevent future disputes.
4. Indemnities: Use indemnities alongside warranties to address specific identified risks, ensuring the seller covers related losses.

Warranties are vital in acquisitions, offering protection and peace of mind to buyers. They mitigate risks, enhance due diligence, provide legal recourse, and facilitate smoother negotiations. Whether you are an investor or a first-time buyer, understanding and negotiating effective warranties is crucial to safeguarding your investment and ensuring a successful acquisition.

How can we help?

With decades of experience between them, our well-respected corporate team has successfully assisted businesses of all kinds with transactions big and small. They will be happy to discuss how to make the best possible use of warranties when buying a company and will work closely with you to draft warranties tailored to your specific needs.

Please contact Brad Stewart on 0113 201 0404 or email ku.oc1728471070.fcl@1728471070trawe1728471070tsb1728471070 for more information.

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