Warranties and Indemnities
Definition
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. An indemnity is a promise to reimburse the buyer pound for pound for a specific, identified risk, such as a known tax exposure or litigation, without the buyer having to prove loss in the same way. In the UK, warranties are qualified by the seller's disclosure letter: anything properly disclosed cannot later be claimed. Sellers negotiate to cap their liability and limit the time within which claims can be brought; buyers, and increasingly warranty and indemnity insurance, cover the residual risk. The negotiation of warranties and indemnities is often the most heavily contested part of the sale and purchase agreement.
Complementary Terms
Concepts that frequently appear alongside Warranties and Indemnities in practice.
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.
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 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 portion of the purchase price in an acquisition that is payable at a future date, either as a fixed amount or contingent on the achievement of specified milestones. Deferred consideration must be recognised at fair value at the acquisition date under IFRS 3 and ASC 805, with subsequent changes in value typically recorded through profit or loss.
Further Reading
Earn-Outs, Warranties and Life After the Sale
How warranties and indemnities shape the post-completion relationship.
Read more →Related FAQ
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.
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