Buying a business: Warranties and indemnities
There is no automatic protection for a buyer in respect of the acquisition of a company or business.
The only protection a buyer enjoys is such provision as drafted by their lawyers within the sale contract – usually taking the form of warranties and indemnities.
A warranty is a contractual statement from the seller to the buyer as to the condition or state of the company or business being acquired at a particular point in time.
If a buyer can show that a warranty was untrue when given and that the breach caused a reduction in the value of the company at that time (which can prove difficult to establish), they can claim damages from the seller.
However, the buyer is under a duty to mitigate its loss – failure to do so can reduce the amount of damages they can claim from the seller.
An indemnity is a contractual promise from the seller to the buyer that it will reimburse the buyer, (usually on a pound for pound basis), in the event of a particular pre-agreed liability arising.
An indemnity places the risk and responsibility entirely with the seller and unlike a warranty, there is no obligation on the buyer to prove a decrease in the company’s value, due to the particular liability event occurring.
A buyer is likely to conduct a due-diligence exercise as part of the purchase process to better understand the legal, financial and commercial aspects of the company or business – this will flush out any risk points which should thereafter, be covered by warranties or indemnities.
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