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25/04/2012 - Covering risk when you sell your business - is insurance the answer?

When you sell your business you will be asked to sign up to "warranties” – statements about your business – as the law implies little protection for the buyer. The warranties will be even more detailed if you sell the shares in your company as the buyer takes over your company with all its liabilities.

Your advisers will work with you to prepare a "disclosure letter”. Normally the buyer will have no come back against you if the matter has been properly disclosed in the disclosure letter, albeit he may want to re-negotiate the price before going ahead with the deal if you disclose something significant.

Risk for something you don’t know about at the date of sale, but which later comes to light, will often rest with you unless you are in the stronger negotiating position. You can cover off this risk by insurance. You can also get cover for something that is known about at the date of sale and could be expensive to resolve but may or may not turn out to be a problem, where the buyer is insisting that you be liable should there be a cost.

The costs of this "warranty and indemnity” insurance is generally 1 to 2% of the price and with a minimum payment of around £40k, so probably only appealing if the sale price is substantial and/or the risk seems significant, or you as the seller are not prepared to take any risk.  It can slow down the deal a bit as the insurer’s lawyers will need to look at the documentation and report to the insurer. Their charges may be an additional cost.

Where you decide not to take out insurance it is even more important that a thorough job is done of properly disclosing all that is relevant to avoid a claim after the sale. Indeed the best approach is to work with your advisers to audit your business before any sale to identify what issues there are and deal with these before it is offered for sale to maximise the price you will get for your business.

If you would like further information, please email David Ashplant or call 01202 786165.

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