Whether you are a buyer or a seller in a mergers and acquisitions transaction, warranties are one of the most important and often underappreciated elements of any deal.
Getting them right can be the difference between a clean exit and a costly dispute that drags on for years.
In the context of an M&A transaction, warranties are contractual statements made by the seller to the buyer about the condition of the business being sold.
They cover areas such as the accuracy of the financial statements, the status of tax liabilities, the enforceability of key contracts, the existence of litigation, the position of employees and much more.
From the buyer’s perspective, warranties provide a route to compensation if a statement turns out to be untrue or misleading and a discovery is made after completion.
From the seller’s perspective, they are a risk that must be carefully managed, limited and where possible, transferred.
Business owners looking to sell need to understand that the warranty negotiation is not simply a legal formality.
The scope and duration of warranties, the financial limits placed on any claims and the disclosure process, in which the seller formally discloses anything that might qualify a warranty, are all critical commercial levers.
Making full and accurate disclosures against warranties is essential. A seller who fails to disclose a known issue, even inadvertently, may find themselves exposed to a warranty claim long after they have left the business.
Good preparation, working with experienced legal and corporate finance advisers, can minimise this risk significantly.
For buyers, warranties are a key tool in managing the risk of acquiring an unknown business. They incentivise the seller to provide accurate information during due diligence and create a mechanism for financial redress if problems emerge post-completion.
Warranty and Indemnity (W&I) insurance has become increasingly common in deals of all sizes, allowing buyers to claim directly against an insurer rather than pursuing the seller personally.
This can make deals run more smoothly and reduce the adversarial element of warranty negotiations, but it is not a substitute for thorough due diligence and well-drafted warranty provisions.
One of the most common mistakes we see is leaving warranty negotiations too late. By the time terms are being finalised, both parties are often keen to get the deal done and the pressure to compromise can lead to poorly constructed protections.
Starting the conversation early and ensuring both sides are properly advised throughout makes for a better outcome for everyone.
Warranties often sit at the intersection of legal detail and commercial reality, which is why they are frequently underestimated until late in the deal process.
Whether you are preparing for a sale or evaluating an acquisition, having clarity around warranties can help prevent unexpected outcomes long after completion.
For advice on structuring warranties in your next transaction, please get in touch with our M&A Partner, Rahid Rashid (rahidrashid@lubbockfine.co.uk), and our network of specialist legal advisers.
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