When independent practitioners are buying or selling a business, half of the sale agreement will be a schedule of warranties. If you are prepared to answer them before you go to market, your business is likely to be given a higher value, because each warranty you cannot confirm is money off the price. Justin Cumberlege reports.
Every business has a history and will have entered into many and varied arrangements, and things may have gone wrong which they have patched up and moved on.
It is vital that when you acquire a business, you find out as much about its history as you can, so you know what you are inheriting and what you will be liable for.
Due diligence is a very important part of the process of buying or selling a business and the buyer will ask to look through all the records they would expect the seller to have kept.
Although a buyer trawls through the past accounts, contracts, employee contracts, information about their premises, claims and reports, these will not tell you everything.
The law in England and Wales – and most Anglo Saxon jurisdictions – follows the maxim ‘caveat emptor’ or ‘buyer beware’. This means that the buyer takes the risk on any purchase.
The way to rebut that risk is by requiring the seller to make representations and then, if any of those representations prove to be wrong, the buyer would claim for damages for the losses which resulted. Warranties are those representations.
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