Vendor Warranties in Business Sales – Don’t Make Promises You Can’t Keep
A typical business sale contract involves among other things, warranties and indemnities provided from the vendor to the buyer. These are meant to cover a whole range of risks and typically run into several dozen pages! They have the effect of transferring risk from the buyer to the seller himself.
Kelly Flynn makes a case here of why it is so important to have these drafted by someone with the right legal expertise. There are numerous major (and minor) points in this section of any SPA (Sale & Purchase Agreement) that could prove dangerous and / or extremely expensive for the vendor if they don’t get it right.
Some examples of warranties include undertakings that all plant and equipment, machinery etc will be in good condition; that accounts and books are accurate; that all regulatory / tax type matters are in order; that premises meet environmental regulations, that there are no known disputes / pending court actions etc.
Indemnities provide for a vendor to indemnify, defend, and hold harmless the buyers for losses incurred by the buyers as a result of the vendor’s breach of contractual obligations.
Buyers and sellers have competing interests here as buyers want warranties and indemnities to be as wide as possible while sellers want just the opposite.
If you are selling your business through a business broker, the broker may suggest you use a generic business sale agreement. However, that agreement might not be totally suitable for your particular business. Make sure you are aware of the warranties that are proposed to be included in the generic agreement, and discuss with the vendor and the broker any warranties that you are not willing to give.
You can read the full article here.