What warranties mean when you sell

When owners first see a draft sale agreement, the warranties section is often the longest and the most unsettling. Pages of statements about accounts, contracts, employees, tax, litigation, and assets can feel like a list of ways to lose money after you have already sold.

Warranties are part of almost every serious SME sale. They are how a buyer checks that what they were told about the business still holds at completion. Understood calmly, they are manageable. Left unexplained, they create fear that slows the deal for no good reason. Here is how we explain them to owners we work with.

A warranty is a statement of fact

In plain terms, a warranty is a promise that something about the business is true as at a stated date. Typical examples are that the accounts give a fair view, that key contracts are in force, that there are no major disputes you have not disclosed, and that the company has filed its tax returns.

If a warranty turns out to be wrong, the buyer may claim for the loss that flows from that breach. That is different from a simple “I hope everything goes well” assurance. It sits in the legal documents, with rules about notice, time limits, and how much can be claimed.

Why buyers ask for them

A buyer cannot know the business the way you do. Diligence reduces that gap, but it never closes it fully. Warranties push the remaining risk back toward the person who lived with the facts day to day.

From the buyer’s side, that is fair. From yours, it means you should only warrant what you can stand behind, and you should disclose anything that would make a clean warranty misleading. A careful disclosure letter is often more protective than arguing over every line of warranty wording.

Disclosure is your main protection

If you tell the buyer about a problem in the proper way before signing, you usually cannot later be sued for that same problem under the warranties. That is why the disclosure exercise matters so much.

Good disclosure is specific. “There may be some customer issues” helps less than naming the customer, the issue, and where the papers sit. Your advisers will guide the format; your job is to be thorough and honest. Surprises after completion are what create claims.

Limits, baskets, and time caps

A well-negotiated agreement does not leave warranty risk open-ended. The important commercial points are usually:

• A de minimis threshold so tiny claims never start.
• A basket or deductible so only claims above a set total can be pursued.
• A cap on total warranty liability, often tied to a portion of the price.
• Time limits — shorter for general commercial warranties, longer for tax and a few other areas.

These numbers are commercial, not sacred. They should fit the size of the deal, the quality of diligence, and how clean the business really is. An owner who has run a tidy firm with good records is in a stronger position to keep the caps sensible.

Warranties are not the same as indemnities

Owners often hear the two words used together. They are related but not identical. A warranty claim usually requires the buyer to show loss caused by the breach. An indemnity is often a promise to cover a specific risk pound for pound, such as a known tax enquiry or a particular dispute.

Indemnities should stay narrow and tied to real, disclosed issues. A long list of open-ended indemnities is a warning sign. Ask why each one is needed, and whether disclosure plus a normal warranty would already cover it.

What you should prepare before the draft arrives

You do not need to become a lawyer. You do need a clear picture of the soft spots in your own business. Before negotiations get detailed, it helps to list:

• Customer or supplier disputes, even informal ones.
• Employee claims, grievances, or unsettled bonus promises.
• Tax filings that were late, amended, or under enquiry.
• Contracts that are verbal, expired, or personal to you.
• Assets used by the business but owned outside the company.
• Any guarantee, litigation threat, or regulatory issue you have been managing quietly.

That list becomes the backbone of disclosure. It also tells you where a buyer may ask for a specific indemnity or a price adjustment. Better to surface it early than watch trust erode late in the process.

Keep proportion

Warranties should protect the buyer against hidden problems, not turn the sale into an open cheque. If the draft reads as if every ordinary business risk sits forever on your shoulders, push back through your advisers. Long-term buyers who know SME businesses usually accept balanced terms when the diligence is solid and the disclosure is frank.

It also helps to separate fear from fact. Many warranty schedules look severe on first reading and become workable once the caps, time limits, and disclosures are in place. Read the package as a whole, not line by line in isolation.

What we look for as a buyer

As a long-term buyer, we want warranties that match reality. We care more about honest disclosure and clean records than about aggressive legal language. If something is imperfect, we would rather know it and price or structure around it than discover it after completion.

If you are thinking about a sale and want a private view of how warranty risk usually sits in deals of your size, a short conversation is enough to start. Nothing needs to leave that room, and there is no obligation either way.