How to use warranties & indemnities to protect your investment when buying a business in England?

One of the ways of acquiring a business is to purchase its shares. If you buy the shares of a business, you buy everything, including any liabilities that the business may have. Hence, if you don’t have protections in place, you risk losing money on the new business because of the unwanted problems you inherit.

We recommend you use warranties & indemnities to protect your investment.

First of all, you should get the seller to give promises about the state of the business, its tax and compliance, called warranties. As an illustration of this, let’s say that after purchasing a business, you discover that your company hadn’t paid all its tax and/or had filed its tax return wrongly in the period before completion of the sale. If you have a warranty from the seller that the company was compliant with tax regulations, then there is a breach of warranty by the seller that will give you a right to claim for damages on the basis of breach of contract.

You may also obtain indemnities: they will reimburse you for a specific liability, in the event that this liability ever arises. For example, indemnities will deal with a potential tax which may arise above the amount provided in the accounts and attributable to the seller’s ownership period.

If you do not have protections in place in the share sale agreement, you could end up with no remedies when you discover liabilities that went undisclosed, resulting in financial liabilities. Not to mention the stress and time spent trying to resolve the problems encountered.

To protect you, you need to put in place the right warranty clauses to ensure that what the seller states is true and if they make a disclosure about a matter, you need to ask them to provide the right indemnities against the risk associated to the disclosure.

Warranties and indemnities serve as important protection mechanisms for a buyer of a business, and they are particularly critical on a company acquisition, where the buyer will inherit the company’s entire tax history as well as its past, present and future liabilities.

The key to getting this right is having the right warranties and the right indemnities specific to your situation that will specifically protect you against the kind of risks you might be encountering on this particular purchase and, as such, you should be assisted by a solicitor with the expertise of buying/selling lots of different types of businesses, so they know exactly which kinds of risks are involved and which warranties and indemnities you will need for your purchase.

If you’re thinking of buying a business, call us at 0203 556 4855 for a free 15-minute initial conversation so that we can find out what your particular circumstances are and highlight for you some of the specific risks you’ll need to be taking into account when thinking about warranties and indemnities.