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Corporate and Commercial: What are warranties and indemnities in the context of a business sale?

January 1st 2021
 

Warranties are statements made by the seller of the business about the condition of the business that is being sold. If a warranty turns out to be incorrect and the value of the business is reduced as a result, the buyer can claim damages (money) from the seller to cover the loss in value. Warranties also prompt sellers to give full information in reply to due diligence questions raised by the buyer, as claims cannot be made when a buyer is formally told in advance (and in enough detail) of the reason why a warranty is or could be incorrect.

An indemnity is a promise by the seller to pay the buyer in certain circumstances. This promise is often linked to future liabilities, so shifts the risk back from the buyer to the seller. There is no need to show the buyer is worse off, just that the specified events have happened. It is usually easier to claim under an indemnity than a warranty, which is why sellers tend to be less keen to give an indemnity.

Warranties and indemnities are complex to negotiate and agree, but do provide the buyer of a business with a much higher degree of protection from the risk of unknown facts and liabilities about the business they are buying. Conversely, a seller who is prepared to give comprehensive warranties and indemnities to protect a buyer may seek a higher price for their business as a result of the additional protection that gives.

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