Expert legal guidance for buying or selling a company

Warranties are legally binding statements included in the sale agreement. They cover various aspects of the business being sold, such as:

• Financial performance and accounting records.
• Compliance with laws and regulations.
• The accuracy of contracts, agreements, and customer obligations.
• Intellectual property ownership and status of assets.
• Outstanding litigation or legal disputes.

The seller gives these warranties to reassure the buyer that the business is as described, with no hidden surprises or liabilities.

Many sellers assume that if there are no glaring issues with the business, the warranties will not be a problem. However, warranties often extend beyond “business as usual” and cover specific details that may not have seemed significant before.

For instance, even routine contracts, such as multi-year agreements with clients, may conflict with the standard warranty requirements if they extend beyond certain terms (e.g., six months’ duration).

Warranties may require you to confirm that all intellectual property used by the company is owned outright, even if your business regularly uses third-party software or assets under licence.

Failing to disclose exceptions or unusual aspects can lead to claims against you after the sale, even if you acted in good faith.

Warranties are not just legal formalities — they can significantly impact the sale process and the final agreement. Here’s how:

• Price Adjustments: If the buyer identifies potential risks or discrepancies during due diligence, they may negotiate a lower sale price or require additional indemnities.
• Increased Liability: Sellers are liable for breaches of warranty. If a warranty turns out to be incorrect, the buyer may claim compensation, which can result in significant financial losses for the seller.
• Negotiation Leverage: Detailed, accurate warranties can give the buyer confidence and help smooth the negotiation process. Conversely, unclear or incomplete warranties can lead to delays or even cause the buyer to walk away from the deal.

Due diligence is essentially a comprehensive review of the business being sold.

For buyers, it’s about gaining a thorough understanding of the company’s financial health, operational structure, and any potential risks. For sellers, it’s an opportunity to showcase the strengths of the business while addressing any areas that might need clarification or disclosure.

The key areas typically covered during due diligence include:

• Financial Records: Reviewing profit and loss statements, balance sheets, and tax filings to assess the financial stability and performance of the company.
• Legal and Regulatory Compliance: Ensuring the company is compliant with relevant laws and regulations, including employment law, health and safety standards, and corporate governance requirements.
• Contracts and Agreements: Examining key business contracts, supplier agreements, and client commitments to identify any obligations or potential liabilities.
• Intellectual Property and Assets: Verifying the ownership and status of key assets, including trademarks, patents, and physical property.
• Litigation and Disputes: Investigating any ongoing or potential legal disputes that could impact the value of the business.

Due diligence is vital because it helps the buyer make an informed decision about the purchase. By thoroughly examining the business, the buyer can:

1. Identify Potential Risks: Highlight any financial, legal, or operational issues that might affect the deal. For example, undisclosed debts or pending litigation could have a significant impact on the value of the company.
2. Negotiate a Fair Price: Due diligence findings often form the basis of price negotiations. If the buyer uncovers risks or areas of concern, they may request a price adjustment or additional indemnities.
3. Ensure a Smooth Transition: Understanding the details of the business helps the buyer plan for a seamless handover and integration post-sale.

For sellers, due diligence is equally important because it provides an opportunity to prepare the business for sale, address any potential red flags in advance, and present the company in the best possible light.

Preparing for due diligence is crucial for a smooth sale process. Here’s what sellers can do to get ready:

• Organise Documentation: Gather all necessary financial records, contracts, and compliance documents in advance. Having a clear, organised data room will make the process faster and more efficient.
• Identify and Resolve Issues: Review your business operations critically and address any potential problems before the buyer’s investigation begins. This could include resolving outstanding legal disputes or clarifying the status of key contracts.
• Work with Legal Advisors: Engage experienced solicitors early in the process to help prepare for due diligence. They can guide you on what information to provide and ensure that any disclosures are properly documented.

A disclosure letter is a document prepared by the seller and shared with the buyer during the transaction process. It outlines specific exceptions or disclosures that may not fit the standard warranties.

In other words, it highlights any information that might contradict the promises made in the warranties, ensuring that the buyer is fully aware of these points before the sale is completed.

Key elements typically included in a disclosure letter are:

1. Exceptions to warranties: For example, if a warranty states that there are no contracts with a notice period longer than six months, but the business actually has a few multi-year agreements with longer notice periods, these must be disclosed.
2. Details of ongoing disputes: Any existing legal disputes or potential claims against the company must be outlined in the letter.
3. Special arrangements or obligations: If the company has any unusual contractual obligations, such as exclusive supplier agreements or bespoke client terms, these need to be disclosed.

The disclosure letter effectively modifies the warranties, limiting the seller’s liability by informing the buyer of the true position.

The disclosure letter plays a crucial role in protecting both parties and ensuring a fair transaction. Here’s why it matters:

Protects the seller from future claims

By disclosing any exceptions or unusual circumstances upfront, the seller reduces the risk of the buyer bringing a claim for breach of warranty after the sale. The buyer cannot later claim they were misled about something that was clearly disclosed in the letter.

Informs the buyer of potential risks

The buyer gains a clear picture of any potential issues or exceptions before the sale is completed. This transparency helps avoid surprises and enables the buyer to make informed decisions.

Supports Accurate Pricing

If the disclosures reveal significant risks or obligations, the buyer may use this information to negotiate a fairer price or request specific indemnities to cover potential liabilities.

The Role of Disclosure Letters in Company Sales

In any company sale, transparency is key. While warranties provide assurances about the state of the business, there will often be exceptions or unique aspects that do not align perfectly with the standard warranties offered in the sale agreement. This is where the disclosure letter comes in.

It serves as a vital document that helps bridge the gap between the warranties and the actual circumstances of the business, protecting both buyer and seller from potential disputes.

As a seller, your primary risk lies in potential claims that could arise after the sale is completed. These claims often stem from breaches of warranty or undisclosed liabilities. Here’s how you can protect yourself:

1. Thorough Disclosures: Make sure to provide accurate and comprehensive disclosures during the due diligence process. This includes highlighting any unusual contracts, outstanding debts, or ongoing litigation. The more transparent you are, the lower the risk of future claims.
2. Carefully Drafted Warranties: Work with experienced solicitors to tailor the warranties in the sale agreement to reflect the specific nature of your business. Avoid standardised warranties that might not apply to your company’s circumstances.
3. Negotiating Indemnities: Consider negotiating indemnities to cover specific risks. Indemnities offer extra protection by ensuring that certain liabilities remain with the seller, such as pending legal disputes or environmental issues.

For buyers, the main risk is overpaying for a company that isn’t as strong as it appears. Without thorough due diligence, you may end up acquiring unexpected liabilities or discovering operational problems that were not apparent during initial discussions. Here’s how to minimise your exposure:

In-depth due diligence

Conduct a detailed review of the company’s financials, contracts, compliance records, and any ongoing disputes. Look beyond the surface and don’t rely solely on the seller’s representations.

Focus on key contracts & obligations

Pay close attention to the company’s key contracts, including client agreements and supplier terms. Unfavourable terms or long notice periods could affect the profitability of the business post-sale.

Use of warranties & indemnities

Insist on robust warranties and indemnities in the sale agreement. This provides a safety net if the seller’s representations turn out to be inaccurate or incomplete.

A successful transaction requires balancing the interests of both parties. Sellers want to exit the business with minimal liability, while buyers need assurances that they are acquiring a sound company. At Anthony Gold Solicitors, we help facilitate negotiations by:

1. Identifying Common Ground: We work with both sides to identify shared goals and address areas of concern early in the process.
2. Advising on Risk Allocation: We provide strategic advice on how to allocate risks fairly, using tools like indemnities and price adjustments to bridge any gaps.
3. Drafting Clear, Concise Agreements: Our team drafts sale agreements that leave no room for ambiguity, reducing the likelihood of disputes after the sale is completed.

Our solicitors have decades of experience handling complex company sales, mergers, and acquisitions. We’ve worked with businesses of all sizes and across various industries, from technology start-ups to manufacturing firms. This depth of knowledge means we can anticipate challenges before they arise and guide you through the process with confidence.

One of the biggest concerns for both buyers and sellers is managing risk. We help our clients identify potential pitfalls early in the process, offering solutions that mitigate these risks effectively. Our services include:

• Thorough Due Diligence: We leave no stone unturned, ensuring that all aspects of the business are fully examined.
• Detailed Contract Review: We meticulously review and draft all legal documents, from warranties and indemnities to disclosure letters, ensuring your interests are protected.
• Strategic Negotiations: Our team has a strong track record in negotiating favourable terms, whether you’re pushing for a higher price as a seller or seeking to reduce your risk as a buyer.

Legal processes can often feel overwhelming, especially when dealing with corporate transactions. We believe in making the process as straightforward as possible for our clients. Our solicitors communicate in clear, plain English, keeping you informed at every stage and explaining complex legal concepts in a way that’s easy to understand.

Corporate transactions often require input from various legal disciplines. At Anthony Gold Solicitors, our integrated approach means you have access to expertise across multiple areas, including but not limited to:

• Employment Law: Handling issues related to staff transfers (TUPE), redundancy, and employment contracts.
• Commercial Conveyancing: Ensuring a smooth transfer of business premises, handling property due diligence, lease reviews, and ownership transfers seamlessly.
• Dispute Resolution: Providing solutions for any legal disputes that arise during or after the sale.