You are going to sell your company. You have agreed on a good price and then comes the first purchase agreement.
In nine cases out of ten, that agreement will then include that you must make all sorts of warranties and that if there is the slightest deviation, you will be liable for the buyer's damages as a result.
Warranties for protection
For many sellers, this creates a negative sentiment. Why all these warranties? Surely they saw everything in the due diligence? True, but the DD due diligence provided the very information that the seller provided and of which the seller himself was aware.
On the contrary, warranties serve to protect against what is not apparent from a DD due diligence and unknown to buyer regardless of whether or not seller knew about it. Suddenly, negotiations then no longer seem to be about something positive like selling the business, but rather just assuming that there are bears on the road and risks to your business that a buyer wants to protect against.
While I am under no illusion that I can completely eliminate that negative sentiment, perhaps I can foster understanding. After all, giving warranties is simply part of a purchase agreement. Consider for yourself which purchases you have made most recently. With all purchases you can expect to get what was promised and if not, you are almost always entitled to repair, compensation or exchange. From clothes to a house, from a computer to a car. If something is wrong, you can go back to the seller and they should make sure you are properly compensated.
Terms of business sale
For regular purchases, the law and often a seller's terms of sale govern the scope of conformity and warranties. Often, then, what can be expected of what you buy is also clear. With clothing, for example, you can expect that there are no (unintentional) holes in it when you buy it new. When buying a house, it becomes a little less clear, but you can usually at least expect it to be suitable for normal use as a home.
But what should one expect from a company being sold going-concern? If you list those conditions in your mind, you will see that those conditions match the list of warranties. To put it in positive terms then: the guarantees are not a list of things that are wrong with the company, the guarantees in fact list all the conditions that the company has to meet as a minimum when it is sold.
The reason that list is often so extensive is to ensure that both parties have clear agreement on what is being purchased. This varies from case to case. For example, the warranties when selling an IT business are different from the warranties when selling a manufacturing business. If, in retrospect, it turns out that a warranty was not met and thus the business purchased does not meet the conditions that both buyer and seller felt the business should at a minimum meet, then the buyer can go back to the seller to be properly compensated.
That's actually pretty logical right? Incidentally, whether and to what extent the seller is subsequently liable again depends on what the parties agree with each other in that regard. I will discuss that in my next expert contribution!
