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The sale and purchase agreement is the binding contract. Your solicitor negotiates it, but you need to understand the parts that affect you after the sale:

warranties, which are statements about the business you guarantee are true
indemnities, which are promises to repay the buyer for specific known risks
the disclosure letter, which sets out your exceptions to the warranties
limits on claims, such as a cap on your total liability, time limits and a minimum claim size
restrictive covenants, which limit you competing or poaching staff and customers
any retention or escrow, where part of the price is held back to cover claims

Warranty and indemnity insurance can move some of the risk to an insurer.

Warranties and indemnities in business acquisitions

Framework for seller warranties, indemnities and limits on claims in sale and purchase agreements for business acquisitions and similar contracts.

In a business acquisition the buyer relies on warranties (the seller's statements about the business) and indemnities (the seller's promises to compensate for specified losses) to protect against undisclosed liabilities and misstatements.

Warranties and indemnities

A warranty is a statement of fact by the seller about the business. If it is untrue, you can claim damages for the loss it causes, and you have to show that loss. An indemnity is the seller's promise to compensate you for a specified loss or liability, whether or not a warranty has been broken. What an indemnity covers depends entirely on its wording.

Financial warranties: Accounts accurate, no undisclosed liabilities, debtors collectable
Legal warranties: No pending litigation, contracts valid, intellectual property owned
Operational warranties: Plant in working order, supplier contracts transferable
Employment warranties: No grievances or threatened claims, TUPE information accurate
Compliance warranties: Regulatory requirements met, licences valid

Common indemnities

Indemnities usually cover specific known risks where the amount is uncertain:

Tax liabilities for periods before completion
Known litigation or tribunal claims
Environmental clean-up costs
Specific contractual liabilities
Regulatory fines or penalties for conduct before completion

Limits on warranty claims

The sale and purchase agreement sets the limits on your claims. These are matters for negotiation and the contract wording.

Time limit: Set in the agreement; without one, the statutory limit is 6 years for a simple contract and 12 years for a deed (England and Wales)
Financial cap: Set in the agreement, often by reference to the price
Individual claim threshold: Claims below an agreed amount can be excluded
Aggregate threshold: Total claims may have to pass an agreed amount before you can recover
Disclosure: Matters the seller discloses against the warranties are normally excluded from claims

Warranty and indemnity (W&I) insurance

Instead of, or alongside, a claim against the seller, the parties can use W&I insurance. With a buyer-side policy you claim against the insurer for a warranty breach rather than against the seller. With a seller-side policy the seller insures its own warranty exposure.

Negotiate the sale agreement