Disclosure Letter
Definition
A disclosure letter is the document a seller delivers alongside the sale and purchase agreement to qualify the warranties they are giving. Warranties are statements that the business is in a particular condition; the disclosure letter sets out the exceptions — the facts that make a warranty untrue or partly untrue — so that the buyer takes the business knowing about them and cannot later claim for what was disclosed. It usually contains general disclosures (matters a buyer is deemed aware of, such as public filings at Companies House) and specific disclosures against individual warranties, supported by a bundle of documents. For a seller, thorough disclosure is the main protection against warranty claims; for a buyer, the disclosure letter is a map of the business's known problems and a prompt for price, indemnity or further diligence. Preparing it well is a reason to organise the evidence base early, before going to market.
Complementary Terms
Concepts that frequently appear alongside Disclosure Letter in practice.
Warranties and indemnities are the contractual protections a buyer receives from a seller in a business sale. Warranties are statements of fact about the business — that the accounts are accurate, that it owns its assets, that there are no undisclosed disputes — and if a warranty proves untrue the buyer may claim damages for the resulting loss.
The sale and purchase agreement (SPA) is the definitive contract that transfers ownership of a business from seller to buyer. It sets out the price and how it is paid, the completion mechanism, and the warranties and indemnities the seller gives about the state of the business.
A comprehensive due diligence exercise commissioned and paid for by the seller of a business prior to a sale process, with the resulting reports made available to prospective buyers. VDD typically covers financial, tax, commercial, and legal matters and is prepared by independent professional advisors.
A formal written assessment, typically prepared by an independent investment bank or valuation firm, evaluating whether the financial terms of a proposed transaction are fair to a company's shareholders from a financial point of view. Fairness opinions are standard practice in M&A transactions and are relied upon by boards of directors to discharge their fiduciary duties.
A specialist insurance policy used in M&A transactions that covers losses arising from breaches of the seller's warranties and representations in the sale and purchase agreement. W&I insurance shifts the risk of warranty claims from the seller to an insurer, enabling cleaner exits for sellers and reducing the need for escrow holdbacks.
A legal concept in M&A agreements defining a significant deterioration in the target company's business, operations, financial condition, or prospects that may give the buyer the right to terminate the transaction or renegotiate the purchase price before completion. MAE definitions are among the most heavily negotiated provisions in sale and purchase agreements, with carve-outs typically excluding general market conditions, industry-wide changes, and events resulting from the announcement of the transaction itself.
A specialist insurance product used in M&A transactions that covers the buyer against financial losses arising from breaches of the seller's warranties and representations in the sale and purchase agreement. W&I insurance has become standard in European PE transactions, enabling cleaner exits (as the seller's liability is capped or eliminated), facilitating auction processes, and allowing PE funds to distribute sale proceeds to LPs without retaining escrow reserves.
A non-binding expression of interest submitted by a prospective buyer in an M&A process, typically stating the proposed purchase price (or price range), the form of consideration, key assumptions, conditions to completion, and an outline timetable. Indicative offers are submitted after review of the information memorandum and before the buyer is granted access to the full data room for confirmatory due diligence.
Further Reading
Preparing Your Business for Sale: The Owner's Checklist
Why early disclosure preparation protects your price.
Read more →Related FAQ
How do I prepare my business for sale?
Get the numbers clean and normalised, tidy contracts and intellectual property, reduce founder dependency, and prepare a vendor due diligence pack and data room — all framed around what a buyer's diligence will test.
Read full answer →What is the difference between a share sale and an asset sale?
In a share sale the buyer acquires the company itself, including its liabilities; in an asset sale the buyer acquires specified assets and leaves most liabilities behind. The choice has major tax and risk consequences.
Read full answer →Heads of terms is the short document recording the main commercial terms a buyer and seller have agreed in principle — price, structure, earn-out, conditions and exclusivity — before formal contracts are drafted. It is mostly non-binding.
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