This article was originally written for and featured in the Financial Times.
I am the director of an IT software company. We want to purchase a smaller company and have been advised to invest in warranties. However, I’ve been told of occasions where people have been told to use them, but when it has come to a problem the warranties have proved to be useless. Is there any point in them?
The short answer is yes. Warranties are statements made by the seller about the business to be sold. The buyer is entitled to rely on the accuracy of these statements and can claim for damages if the statements are untrue.
The buyer of a software business should, for example, seek warranties concerning the integrity of its intellectual property and IT rights, including an assurance that such rights are properly vested in the target company. A seller cannot reasonable resist such warranties.
If, at completion date, such rights are not owned by the target company, the buyer can sue the seller unless the seller has disclosed the problem to the buyer or other limitations apply. Numerous other warranties will typically be sought to cover issues such as the finances of the target business, its employees, contracts and other litigation.
Precautions should be taken to avoid warranties proving “useless”. First, ensure those giving the warranties are able to meet a claim. Second, seek a retention from the purchase price to meet any claim. Third, appropriate due diligence is essential to underpin warranties.