Understanding the Differences Between Warranties and Indemnities in Business Sales
As you approach the end of a business sale process, thoughts of celebration may come to mind. However, for legal teams, ensuring the acquirer’s protection remains a top priority. After conducting due diligence, buyers rely on warranties and indemnities to shield themselves from post-deal surprises.
Warranties and indemnities play crucial roles in business transactions. Warranties are statements that affirm the health and truthfulness of the business, while indemnities commit to compensating the buyer for specific post-transaction liabilities. Essentially, warranties ensure truthfulness, and indemnities ensure compensation for specific circumstances.
In the context of business sales, warranties are contractual statements developed through the due diligence process. Buyers’ queries receive detailed responses, which are then documented in the sale and purchase agreement. Accuracy in these responses is crucial to avoid post-sale liabilities.
Warranties, while enforceable, often come with cost limitations. Claims might only be triggered after a ‘de minimis’ threshold is met, with a maximum payout ceiling also in place. To mitigate seller concerns, warranties should have a specified time limit, ensuring they don’t extend indefinitely.
Indemnities are designed to transfer post-deal risks from the buyer to the seller, addressing issues that may not have been known at the time of sale. Unlike warranties, indemnities solely favour the buyer, providing a layer of protection against unforeseen liabilities.
Warranties and Indemnities in Action
- Workplace Accidents: If an accident occurs on the day of the transaction, indemnities ensure the seller is responsible for compensatory payments, not the buyer.
- Adverse Tax Judgements: An example could be the HMRC deciding that contractors were actually employees under IR35 regulations, resulting in a significant tax liability for the business.
Negotiating Indemnity Terms
Given the potential financial impact of indemnities, which can reach the entire purchase price, negotiating terms is critical. It’s important to seek a capped indemnity with a defined duration. Engaging an experienced M&A lawyer is essential for navigating these complexities and securing a successful deal.
Ensuring Peace of Mind
Exploring warranty and indemnity insurance can provide added peace of mind for sellers. The premiums for such insurance typically depend on the depth of due diligence conducted, highlighting the importance of comprehensive information in the virtual data room.
Seek Expert Advice
In the intricate landscape of business transactions, understanding the differences between warranties and indemnities in business sales is vital. Guided by specialist advice, you can ensure a smoother journey to a successful deal. Appointing a seasoned professional with extensive M&A experience can make a significant difference, turning the upfront advisory costs into a worthwhile investment that protects you from future liabilities.
Whether you are in the early stages of considering an exit or have already embarked on the journey, contact Partners Mark Crossfield (07780 957631) or Geoff Pinder (07717 874357) for a confidential discussion.