Vendor Warranties in Business Sales – Don’t Make Promises You Can’t Keep

If you are thinking about selling your business, it is important to consider the extent and structure of any vendor warranties you give as part of any sale agreement. Providing warranties about matters that you don’t know about, or that you know are not true, can have serious legal and financial consequences.

Vendor warranties are promises provided by a vendor to the buyer as part of a business sale agreement. Essentially, the vendor will be promising to the buyer that a particular state of facts exists. Vendor warranties are important for the buyer, as they provide certainty that the buyer is getting what they pay for. They are also important for the vendor because comprehensive warranties usually make a business easier to sell, and at a higher price.

Examples of vendor warranties

The following are examples of vendor warranties that will often appear in a business sale agreement:

  • all plant and equipment, machinery and fixtures of the business will be in good working order and condition;
  • the books and finances of the business are up to date and accurate;
  • the business and the business premises have all necessary government approvals or licences, and complies with all relevant legislation and/or regulations; and that
  • there are no outstanding orders or notices that may affect the business, or no known legal disputes or claims to which the business may be subject.
The importance of the warranties you are giving

When it comes time to sign off on the business sale agreement, it is extremely important to make sure that you are aware of the warranties you are giving, and that the warranties are true. Failure to do so can have disastrous consequences.

For example, the seller of a manufacturing business gives a warranty that all plant and equipment in the factory is in good working condition. However, a few weeks after settlement a key piece of machinery breaks down, and the technician reports that the breakdown is due to inadequate maintenance.

The buyer may have a claim against the vendor for a breach of warranty, in that the machinery was not in good working condition at the time of sale. The vendor may consequently be liable to pay the buyer’s costs of repairing the machine, and may also be liable to pay for any business losses the buyer suffers whilst the machine is out of action.

3 Tips when making vendor warranties in business sale agreements

Tip 1 – Read the warranties

If you are selling your business through a business broker, the broker may suggest you use a generic business sale agreement. However, that agreement might not be totally suitable for your particular business. Make sure you are aware of the warranties that are proposed to be included in the generic agreement, and discuss with the vendor and the broker any warranties that you are not willing to give.

Remember – a generic agreement can be amended by the parties to be more suitable for the transaction, but only before the agreement is signed.

Tip 2 – Consider Warranties and Indemnities Insurance

If you are looking to make a clean exit from the business and mitigate your risk of future financial liability, you may wish to consider investing in vendor’s warranty and indemnity insurance.

Depending on its terms, warranty and indemnity insurance generally protects the vendor from claims by the buyer for any breach of warranty given in the business sale agreement. It provides the vendor with comfort that, even if it gives an inaccurate warranty during the sale, it can be protected by the insurance policy from future financial liability.

Tip 3 – Get legal advice

In every business sale scenario, the vendor should seek advice from a lawyer prior to signing any agreement. A lawyer will be able to identify any potentially problematic warranties and, if required, negotiate on your behalf to ensure that your future financial risk is reduced.

Even better, a lawyer can draft a bespoke business sale agreement that suits your business and protects your interests both now and in the future. A small investment in legal advice at the start of a transaction provides the vendor with peace of mind, and can protect the vendor from significant potential financial loss in the future.

The information published in this paper is of a general nature and should not be construed as legal advice. Whilst we aim to provide timely, relevant and accurate information, the law may change and circumstances may differ. You should not therefore act in reliance on it without first obtaining specific legal advice.