Why a disclosure today protects your share proceeds in the future

The time for Full Disclosure

Through all the exhilaration, stress and the emotional rollercoaster of a sales process in which the entrepreneur works towards handing over the keys of his life’s work, there comes a point in every disposal transaction that the seller needs to clearly understand the contractual representations they will make and their implications. To use a car-analogy - this is essentially when the “rubber hits the road”, and things get serious. This point arises near the end of the exhausting marathon of diligence and SPA negotiations, when the seller and his lawyer will often prepare a “disclosure letter”, which forms a key part of the contractual process. The “disclosure letter” is an opportunity for the seller to fully clarify any defects or issues which exist within the business, so that the buyer can complete the transaction with a full knowledge of any risks. If however the seller fails to make adequate disclosures, they may well find themselves at some time in the future receiving a breach of warranty claim, which will attack the very sales proceeds they had fought so hard to achieve.

What's a warranty and what should be disclosed?

In previous articles we have taken the liberty to equate the process of selling your business with the selling of your private vehicle. Both are effectively “sales processes”, where you seek to polish and enhance the appearance of your asset in order to seek a premium value. Another interesting similarity is that both asset-sales rely on the legal principle of “buyer beware”, since there is little alternative statutory or common law protections for the buyer.