As a seller, you often need to balance between keeping a buyer happy and ensuring that your interests are maintained. Managing warranties relating to accounts and information warranties fall squarely in that space.
Even after carefully negotiating other more precise warranties, you can fall into the trap of providing broad or improper accounts or information warranties. This could leave you open to warranty claims despite going through time-consuming (and expensive) negotiations and making disclosures to try to limit your liability.
Accounts warranties
An account warranty essentially guarantees the accuracy of accounts of the business or company being sold. It’s a critical part of the buyer’s due diligence. Whilst there’s an expectation that account warranties are a “true and fair view”, you should be wary of applying this when accounts have been unaudited. Instead, think about adopting the following warranty for unaudited accounts:
“The Accounts have been prepared with due care and attention and do not materially misstate the Company’s financial condition as of the Accounts Date or its performance for the financial period ending on the Accounts Date.”
If buyers don’t rely significantly on management accounts, you should avoid providing them. Generally, a buyer may only need a management account warranty when it’s been more than a few months since the previous full-year balance sheet date.
Management accounts are frequently created for various objectives or by various standards. To reflect this, you should modify or soften the language of management account warranties. For instance:
“The Management Accounts have been prepared by the Seller with due care and attention and, so far as the Seller is aware, show with reasonable accuracy the state of affairs, profit or loss of the Company as at and for the period in respect of which they have been prepared.”
You can further reduce your risk by including an acknowledgement given by the buyer that the management accounts are not audited or prepared on a statutory basis.
Debtor and inventory warranties are also often the cause of disputes. You should ensure that you are released from liability for warranty claims to the extent that the items warranted have already been considered in the initial purchase price or dealt with in subsequent adjustments.
Knowledge warranties
You should avoid making warranties that you have provided all information that a buyer would need to decide whether to purchase the business or company, as this can open yourself to subjective arguments. You’re not a mind reader.
Instead, you should suggest that you are able to warrant that your disclosures are accurate in all relevant respects and that they are not aware of any details that are misleading in all pertinent regard or that have been left out of the disclosure materials. There are different ways of wording this and the right approach will depend on how the due diligence process has progressed.
You should include a disclosure letter or schedule that supplements the disclosure documents if you have doubts about whether certain information has been disclosed. Disclosure letters offer protection to ensure that you have made all critical disclosures to the buyer.
Understanding how to negotiate accounts and information warranties is critical – It will protect you as a seller and keep a buyer at ease and help everyone to move the deal forward with confidence.