In a company sale, the buyer will ask for a warranty except if they are taking over goodwill.
This warranty is called asset and liability warranty.
In practice, it is an element of the sale contract or a separate document.
• Asset and liability warranty
The asset and liability warranty allows the buyer to protect themselves against future charges, which were not apparent in the social accounts, which served as a basis for the transaction.
For example, here are the most frequent:
- Guarantee implemented by a client for sales deliveries that took place before the company sale.
- Tax adjustment for the period before the sale.
- Competitor's or employee’s trial for something which happened before the sale.
Of course, this guarantee covers, in the majority of cases, lack of assets.
For example:
- doubtful assets,
- missing stock,
- a dispute over a building,
- equipment appearing on balance sheets.
• Guarantee of the guarantee
For quite large files, the buyer will ask for a payment guarantee in case the warranty liability is implemented.
In practice, this guarantee can be made in the following ways:
- a part of the price will be paid later and will act as the guarantee.
- a bank guarantee is given by the vendor.
• Specific warranties
As well as liability warranties, the buyer could ask for warranties on particular points, for example:
- Warranties on the legality of the business (business conforms to laws, administrative authorisations are in order, shares ownership, patents, brands...).
- Guarantees against environmental risks.
In practice, these guarantees are given by the seller in the form of a series of declarations, which figure in the transfer contract.
• The procedure guarantee implementation
It is important to precisely define the manner in which the guarantee will eventually be put in place:
- Material organisation (registered letter, minimum threshold, delay, limitation of action...)
- The seller’s right to monitor disputes (common negotiation clause)
- Possibilities of arbitration in the case of appeals.
• Precautions to take
Warranty liability is one of the most important elements for the transmission of a company.
This document is just as important as the sales contract itself.
Be aware of accounting standards used to stop accounts specified in the contract (The Novartis result falls by 70% if the US GAAP are applied)
In order to protect the seller from excessive implementation (common with certain British buyers), it is important to have protection clauses, such as:
- The total of the insurance cannot exceed the sale price.
- The amount of warranty is limited.
- Boni and mali are compensated for.
- There is a threshold for warranty implementation and to avoid petty disputes.
- Certain delicate points are expressly listed in the sale to prevent the buyer from bringing them up later.
Guarantees
