Sales Agreement. The Importance of Warranties

by | Mar 23, 2023 | Business Sellers & Purchasers, Commercial Clients, Tradie Businesses

Why business sellers need to be careful about the sellers warranties they include in business sale agreements.

It is essential that all parties who enter a business sale agreement abide by the conditions and warranties within it and must fully understand the sale agreement warranties importance.

In a typical business sale agreement, a warranty may be, for example, that all machinery and equipment will be in good condition. If the seller fails to disclose a faulty machine and the buyer finds that this equipment is faulty, there has been a breach of a warranty by the seller and the buyer may be entitled to claim any losses suffered due to the breach of warranty.

The Significance of Warranties in Business Sale Agreements:

When it comes to business sale agreements, many people focus on the conditions and overlook the importance of warranties. However, warranties can play a critical role in protecting both parties and ensuring a successful deal.

While conditions outline the major terms of the agreement, warranties can cover a range of promises made by the seller, such as the accuracy of financial statements or the absence of legal disputes. For instance, if a seller warrants that the financial statements accurately represent the financial condition of the business, but it later turns out that there were significant inaccuracies, the buyer may be able to claim damages resulting from the breach of warranty.

Including warranties in your business sale agreement can have several benefits for both parties. Firstly, they provide a sense of security for the purchaser, knowing that they have some recourse if the seller fails to meet their promises. This can increase the buyer’s confidence in the deal and make them more likely to proceed with the purchase.

Warranties can also benefit the seller by increasing the perceived value of the business. By providing warranties, the seller shows that they are confident in the quality and condition of the assets being sold. This can make the business more attractive to potential buyers and may even result in a higher sale price.

What Happens if a Business Seller Breaches a Warranty?

When a business seller breaches a warranty in a sale agreement, it can result in significant losses for the buyer. However, there are remedies available to the injured party under the law.

The two potential options for the party who has suffered a loss due to a breach are:

1) damages to compensate for the loss; and

2) the right to terminate the agreement.

The right to terminate the agreement is only available if the breach was severe.

It’s important to note that all contractual deals with consumers are governed by the Competition and Consumer Act 2010 (Cth). This law requires business sellers to abide by certain provisions contained in Schedule 2 of the Act, known as the ‘ACL’.

One of the most important provisions is Section 18 of the ACL, which prohibits the making of misleading and deceptive representations. Another important provision is Section 4(2) of the ACL, which prohibits representations about future matters that are misleading, such as the future financial performance of a business.

If a business seller fails to comply with the law, it can have serious consequences. This may include costly and time-consuming court litigation, expensive damages that must be paid to the buyer, or even forfeiture of the agreement. It’s important for business sellers to understand and follow the law to avoid these negative outcomes.

Tips to Avoid Breaches of Warranty in Your Business Sale Agreement

As a business seller, it’s essential to provide accurate information to potential buyers to avoid breaching any warranties in the sale agreement. While purchasers should do their own due diligence, you can take certain steps to ensure compliance with the law.

Here are some tips to avoid breaches of warranty in your business sale agreement:

1. Avoid making representations about the future success of the business. Instead, focus on providing accurate and factual information about the business’s current state.

2. Only include warranties that you know to be true and correct. Avoid making promises that you can’t keep, as this can lead to breaches of warranty.

  1. Qualify all warranties within the business sale agreement with disclosure during the due diligence process. This will help to ensure that the buyer is fully aware of any potential issues and can make an informed decision.

 

By following these tips, you can help avoid breaches of warranty and ensure compliance with the law. Remember that providing accurate and truthful information is essential to building trust with potential buyers and completing a successful business sale.

 

In summary, breaching a warranty in a business sale agreement can have serious consequences for both parties. If you’re a business seller, it’s essential to understand your legal obligations and ensure compliance with the law to avoid any negative outcomes.

This blog emphasises the importance of warranties in business sale agreements and provides tips for sellers to avoid breaching them. It highlights the potential consequences of breaching warranties and emphasises the importance of providing accurate information to build trust with potential buyers.

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Related article: Buying a Business

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Helen Kay - Managing Director

Helen Kay

If you require any assistance with your business legals or any other commercial legal issue, please do not hesitate to contact me.

Typical Legal Disclaimer!…

Unfortunately, there is never a ‘one size fits all’ formula to apply. Every situation is unique and it can be tricky to wrap your head around some areas of the law. To ensure you are setting yourself and your business up for success, it is always best to consult a legal professional with expertise in the field.

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