We explain what the major documents are in the legal process of buying a business.
Warranties, limitations and disclosure letter
One of the main sections of the sale agreement deals with the warranties and indemnities.
These are detailed statements by the seller about various aspects of the business, such as trading, finance, assets, liabilities, employees, property, litigation and tax. You will rely on these statements and if any of them turns out to be untrue and you suffer loss as a result, then you can claim damages against the seller.
The seller will want to limit its liability:
- first, by negotiating the warranties so they only contain statements about the business which the seller is happy to give
- secondly, by preventing claims above a specified limit (e.g. the price) or after a certain date (e.g. two years after completion)
- and thirdly, by preparing a ‘disclosure letter’ which will list any specific exceptions to the warranties, and is normally accompanied by a pack of the documents which were provided to the buyer in the due diligence process, so you cannot claim damages for anything which has been properly disclosed on those documents.
Other major documents
- Tax deed – on a share sale, you will inherit all tax liabilities of the target company and you should therefore ask for a specific indemnity against these – given in the form of a tax deed or tax covenant.
- Service contracts – you may also want individual sellers or key employees who are remaining with the business to sign new service contracts governing their relationship with you going forward.
- Banking documents – if you are borrowing part of the purchase price, you will have to sign a loan agreement and security documents, creating charges over the assets of the business in favour of the lender. You and your directors or shareholders may also be asked to sign personal guarantees and mortgages over your own property to secure repayment of the loan.
Click here to read the full briefing series: Buying a business.
If you are looking to sell your business, please see our ‘Selling a business’ series.