The disclosure letter: what it is and why it matters

Towards the end of a sale, most owners will be asked to give warranties: statements about the business that the buyer relies on, such as that the accounts are accurate, there are no disputes and the key contracts are in force. Very few businesses match every warranty perfectly. The disclosure letter is where you set out the exceptions.

It can feel like paperwork at the end of a long process, but it is one of the most important documents you will sign. In this article we explain what a disclosure letter does, what usually goes into it and how to prepare it without last-minute stress.

What the disclosure letter does

Warranties are written as broad promises. The disclosure letter qualifies them. If a warranty says there are no customer disputes, but one customer has raised a complaint about an invoice, you disclose that complaint against the warranty. Once something has been properly disclosed, the buyer generally cannot bring a warranty claim about it later, because they knew about it when they agreed the deal.

In other words, the letter moves known issues out of the category of a future claim and into the category of something the buyer has already taken into account. That is why careful disclosure protects you as the seller.

General and specific disclosures

Most disclosure letters have two parts. General disclosures cover matters treated as known to the buyer, such as information on public registers or, often, the documents placed in the data room during due diligence. Buyers sometimes push back on how widely these are drawn, so the wording is usually negotiated by the lawyers on both sides.

Specific disclosures are set against individual warranties. They describe a particular matter in enough detail for the buyer to understand it: a lease that is due for renewal, an employee claim that has been settled, a supplier contract that can end on a change of ownership. The usual expectation is that each disclosure is fair, meaning clear and specific enough for the buyer to judge its significance.

What tends to come up

• Customer or supplier disputes, even small ones that are close to being resolved.
• Contracts with unusual terms, or that can be ended if the business changes hands.
• Employment matters, such as grievances, settlement agreements or staff on long-term leave.
• Property points, including lease renewals, repair obligations or planning questions.
• Gaps in records, licences, insurance or policies that the business has since tidied up.
• Any correspondence with tax authorities or regulators that is still open.

How to prepare without the rush

The disclosure letter is often drafted in the final weeks, alongside the sale agreement, which is when everyone is tired and time is short. It helps to start earlier. When you prepare for a sale, keep a running note of anything that is not quite as it should be. Your finance lead, office manager or operations team may know about issues you have forgotten, so ask them.

Then read the draft warranties carefully, line by line, and ask yourself whether each one is completely true. Where it is not, tell your solicitor. They will draft the disclosure in the right form. It is usually better to disclose something that turns out to be minor than to leave out something that a buyer later says should have been mentioned.

Why openness helps the deal

Some owners worry that disclosing issues will reduce the price or put a buyer off. In practice, a buyer has usually seen most of these points during due diligence already, and a clear, honest disclosure letter builds trust at an important moment. Surprises are what unsettle buyers. Known issues can be discussed and, where needed, dealt with through the price, a specific indemnity or a practical fix before completion.

How we approach this

We buy businesses to own them for the long term, so we would much rather hear about an issue early and plan for it together than discover it after completion. We try to keep warranties sensible and proportionate to the business, and we expect sellers to take their own legal advice on the disclosure letter. If you would like to talk through how this stage of a sale might work for your business, a short, confidential call is a sensible first step, with no obligation either way.