Selling a business: Major documents and reducing your risks

Selling a business can be expensive, complicated and time-consuming, and may also have significant tax implications, so you need to plan carefully and get the right advice at an early stage. In this series of briefings, we will explain the full process of how to sell your business.

Warranties, limitations and disclosure letter

One of the main sections of the sale agreement deals with warranties and indemnities – the detailed statements which you will be asked to make about aspects of the business, such as trading, finance, assets, liabilities, employees, property, litigation and tax.

The buyer will rely on these statements and if any of them turns out to be untrue and the buyer suffers loss as a result, then it can claim damages against you.

You should therefore limit your liability:

  • By negotiating the warranties so they only contain statements about the business which you are happy to give
  • By preventing claims above a specified limit (e.g. the price) or after a certain date (e.g. one year after completion), and
  • By preparing a ‘disclosure letter’ which lists any exceptions to the warranties, so the buyer cannot claim damages for those matters

The preparation of the disclosure letter can be time-consuming, but it can reduce your exposure under the warranties, so it is worth taking the trouble to go through the warranties and think carefully about what matters should be disclosed.

In addition, all the information which you disclosed to the buyer in the due diligence exercise should be attached to the disclosure letter.

Tax deed

On a share sale, the buyer inherits all tax liabilities of the company and may therefore ask for a specific indemnity against these – in the form of a tax deed or tax covenant. You should limit your liability under the tax deed, as discussed above.

Service contracts

The buyer may also want individual sellers or key employees who are remaining with the business to sign new service contracts.

After completion

You must keep copies of the sale documents and the information which you supplied to the buyer during the sale process, as you will need to refer to these if the buyer brings a claim against you after completion.

Click here to read the full briefing series: Selling a business.

For more information or guidance, please get in touch with:

Peter Coats
Partner and Head of M&A
T. 020 7227 7441
E. peter.coats@rlb-law.com


Disclaimer

This briefing is for guidance purposes only. RadcliffesLeBrasseur accepts no responsibility or liability whatsoever for any action taken or not taken in relation to this note and recommends that appropriate legal advice be taken having regard to a client's own particular circumstances.

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