Warranty Liability

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.

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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.

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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.

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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.

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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.

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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.

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