Buying a Business: Vendor Warranties that may actually save you

It is of course critical to carry out extensive due diligence when purchasing a business. There may however be certain issues which, no matter how deep you dig, are not readily apparent. One way of mitigating the unforeseen consequences of such issues is to impose obligations on a vendor to make certain statements and disclosures. These obligations are called warranties. These warranties can form the basis of a claim against a vendor if a purchaser later discovers an issue that is contrary to the warranties given by a purchaser. 

It is helpful if the warranties are specific to the business being purchased and surrounding circumstances of the purchase. A purchaser may be relying on certain key information received during its due diligence, for example the turnover generated in the most recent financial year. There may however have been circumstances within the business, or its industry, which are abnormal that have caused a higher turnover than would normally be the case but for these circumstances. In this case, a purchaser should consult with their lawyer and accountant. If it decides that it still wants to purchase the business, notwithstanding the possibility it cannot with certainty rely on the financial information as an accurate representation of the ongoing ability of the business to generate this stated turnover, a warranty can add protection. In this instance, a warranty from the vendor that the financial information provided is not affected by any unusual, abnormal, extraordinary, exceptional or non-recurring event could be included. 

Warranties of this nature are however by no means a foolproof solution to mitigating risk. If due diligence has been performed, and a vendor has acted transparently and honestly in providing all requested materials, it can be difficult persuading a court that a vendor is liable for losses suffered. Rather, warranties are best viewed as a device by which at least some degree of protection can be provided that may give a purchaser recourse if it can prove a vendor was aware of circumstances that contradicted the warranties it has given. There are also other matters to consider regarding the efficacy of enforcing warranties, such as whether breach of warranty caused loss which is capable of being proved by the purchaser, and the financial position of the vendor entity and their principals: this article does not however deal with these matters and formal legal advice should be sought in this regard.

The information on this blog is general in nature and does not constitute legal advice. For expert legal advice in drafting the right buy-sell agreement for your business, please contact Shane Rohde at [email protected] or Rebecca at [email protected].

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