Minimising risk through warranties and protections

A warranty is a statement in the sale agreement relating to the business being sold which amounts to a contractual promise. This may be, for example, that the company is not involved as a party to any proceedings before any court or tribunal.

Warranties therefore become negotiating points.

This can be through time limits and maximum financial limits on claims, an aggregate level of claims, or stating a de minimis limit, which is a threshold below which individual claims will be disregarded.

Such provisions ensure the buyer carries on the business in the ordinary course and to maximise profits, not attempt to reduce or distort the amount of the earn-out, and not to divert the business or manipulate profits. As the seller, failure to seek sufficient protection can result in costly claims or a reduction in the earn-out.