Most people assume that if there business is “normal” and there are no specific problems affecting it, that when they sell the company which owns the business there will be no claims against them. However, as a seller you are required to give “warranties” (which are promises about the business owned and operated by the company being sold). These warranties often cover things which are “business as usual” for you.

The process of “due diligence” by the buyer (investigating the business of the company they are buying, so that the buyer’s management team have a thorough understanding of what is being bought) will involve them receiving a lot of information from the seller. That information is then usually attached to a “Disclosure Letter” which, in effect, amends the warranties.

For example, there is usually a warranty to say that there are no contracts of more than six months’ duration or with more than a six month notice period. Your business might entirely consist of multi-year contracts with 12 month notice periods. If that is the case, the warranty needs to change so that you are disclosing exceptional situations to the buyer, not every contract to which the company is party.

Therefore, assuming you have only a few contracts which are of more than six months’ duration or which cannot be terminated by six months’ notice, you would disclose only those contracts. By doing so, you are telling the buyer that the warranty is incorrect in relation to those contracts. The disclosure is, in effect, an amendment to the warranty.

As a buyer, on the other side of this process, you are looking to understand what you are buying and, like the seller, are trying to get to a position where there are no surprises after completion. Your due diligence process may give rise to a reduction in the price (that horrific litigation is going to cost the seller) or might cause you to walk away from the purchase. This too is a successful outcome. Not buying a nightmare leaves you free to buy your dream.