By the time the share purchase agreement lands, most sellers have stopped reading. The price was settled months ago, diligence has been exhausting, and the document that arrives runs to well over a hundred pages of which perhaps forty are a schedule of warranties written in a register nobody speaks.
Those forty pages are the part where you personally accept liability. Not the company — you, the seller, in your own name, out of the money you are about to receive. And the only document that limits them is one your own solicitor drafts, usually last, usually under time pressure: the disclosure letter.
A warranty is a contractual statement of fact about the business, given by the seller as at completion. “The company has complied in all material respects with the terms of its professional indemnity insurance.” “There is no litigation pending or threatened.” “The accounts give a true and fair view.” There will be a hundred or more of them, covering accounts, tax, employment, clients, contracts, property, data protection, regulatory compliance and intellectual property.
If a warranty turns out to be untrue, the buyer's remedy is a claim in damages for breach of contract: the difference between what the business was worth as warranted and what it was actually worth. That is a different measure from what it cost to put the problem right, and on a multiple-based valuation it can be considerably larger than the underlying issue — a recurring cost the buyer did not know about gets multiplied.
Two distinctions matter and sellers routinely miss both.
Warranties are not indemnities. An indemnity is a promise to reimburse pound for pound on a specified risk — usually one that diligence has actually found, such as a live tax enquiry or a known employment claim. It sidesteps the questions of causation, remoteness and mitigation that a warranty claim has to run. If a buyer asks to convert a warranty into an indemnity, they are asking for a materially better remedy, and that is a negotiation, not a formality.
Warranties are given by the individuals, not the company. On a share sale the company is what is being bought, so a warranty from the company would simply be the buyer suing itself. Liability sits with the selling shareholders. Where there are several of you, whether that liability is joint and several — each of you liable for the whole — or several only, capped at each person's share of the proceeds, is one of the more consequential lines in the entire agreement.
The mechanism is simple and it is the whole game. A warranty is given subject to matters disclosed. Anything properly disclosed in the disclosure letter cannot afterwards be the subject of a warranty claim, because the buyer bought with knowledge of it.
So the letter is not an administrative annex. It is the document that converts “there is no litigation pending or threatened” into “there is no litigation pending or threatened, except the one described at paragraph 14.3”. The warranty stays broad; your exposure narrows.
It comes in two parts. General disclosures are the sweep-up: matters on public registers at Companies House and the Land Registry, correspondence in the data room, filed accounts. Specific disclosures are the ones that do the work, keyed to individual warranty numbers, each describing an actual fact about your firm.
The standard the letter has to meet is the negotiated one, and the wording matters more than it looks. English law drew the distinction sharply in Infiniteland Ltd v Artisan Contracting Ltd [2005] EWCA Civ 758, where the Court of Appeal considered what constitutes disclosure and whether a buyer can claim on a breach it already knew about. The Court held on the facts that there had been a general disclosure of the written material supplied to the reporting accountants, and that there was accordingly no breach of warranty. The practical reading for a seller is that the drafting of the disclosure standard — “disclosed”, “fairly disclosed”, “fairly disclosed with sufficient detail to enable the buyer to assess the matter” — is a real negotiation rather than boilerplate, and each formulation shifts risk.
Five numbers in the limitations schedule determine your real exposure. They are negotiated, and a seller who arrives without a view on them accepts the buyer's.
This is an illustrative example, constructed to show the mechanism. It is not drawn from any particular transaction.
A practice sells for £2.4m: £1.68m at completion and £720,000 deferred over two years. The warranty cap is agreed at 50% of consideration, which is £1.2m. The seller reads that and concludes the worst case is manageable, because the completion cash alone exceeds it.
Then look at where the money actually is. Nine months after completion the buyer notifies a claim for £310,000 arising from a client matter that predates the sale and was not disclosed. The agreement gives the buyer a right of set-off against the deferred consideration. The claim is disputed and will take a year to resolve. In the meantime the deferred payments stop.
The seller's position is now that £720,000 of their own sale proceeds is being withheld against a £310,000 claim they believe is wrong, and the only route to recovering it is litigation against a counterparty who is already holding the money. The £1.2m cap has done nothing at all, because the cap governs the ceiling on liability and the fight is about possession of cash.
Two provisions would have changed that outcome, and both are negotiated at the drafting stage rather than discovered afterwards: limiting set-off against deferred consideration to claims that are agreed or finally determined, and requiring disputed claims to be dealt with under an expert determination clause with a fixed timetable. Neither costs anything to ask for while the buyer still wants the deal.
W&I insurance is now common on mid-market deals, including in professional services. A policy sits behind the warranties so that the buyer claims against the insurer rather than against the seller, with the seller's contractual liability reduced to a nominal amount.
It is genuinely useful where the sellers are retiring and want a clean break, or where there are many small shareholders and chasing them individually would be impractical. It is not a substitute for a properly built disclosure letter. Underwriters price on the quality of the diligence and the disclosure process, they exclude known risks — anything already found is uninsurable by definition — and the policy has its own de minimis and retention. A thin disclosure exercise produces an expensive policy with wide exclusions, which is the worst of both.
Start the disclosure letter when the data room opens, not when the agreement arrives. It is the single most useful piece of preparation available, and it is almost always left too late.
Read every warranty yourself, out loud, and mark each one as true, true-with-qualification, or not true as drafted. You are the only person in the process who knows the answers; your solicitor is drafting from what you tell them, and a warranty you skim past is one you have personally guaranteed.
Disclose more rather than less. The instinct is to keep the letter short so the firm looks clean. That instinct is backwards: a disclosed problem is a priced problem, and an undisclosed one is a claim waiting. The things sellers most regret not disclosing are the ones they had privately decided were not material.
And settle the security position before you settle the cap. Where the deferred consideration sits, what can be set off against it and how a disputed claim gets resolved will matter more to you than the headline limitation. Our notes on how earn-outs actually work and where the price gets chipped in due diligence cover the two stages either side of this one, and preparing your firm for sale is where the disclosure work properly begins.
Sources: Infiniteland Ltd & Anor v Artisan Contracting Ltd & Anor [2005] EWCA Civ 758 (Court of Appeal, 22 June 2005) is the leading English authority cited on what constitutes disclosure under a share sale agreement and on a buyer's knowledge of a breach. The transaction figures in this article are illustrative and are not drawn from any particular deal.
This article is general information about how warranties and disclosure operate on a professional-services transaction, not legal, tax or investment advice, and Founder Capital LLP is not authorised or regulated by the Financial Conduct Authority. Nothing here is an offer or invitation to invest; any investment opportunities we reference are available only to professional investors, certified high-net-worth individuals and self-certified sophisticated investors, are not open to retail investors, and capital is at risk and returns are not guaranteed. Please take specific advice from a qualified corporate solicitor before you sign anything.
A warranty is a contractual statement of fact about the business. If it turns out to be untrue, the buyer sues for breach of contract and has to prove loss, causation and remoteness, and must mitigate. The measure is the difference between what the business was worth as warranted and what it was actually worth, which on a multiple-based valuation can far exceed the cost of fixing the underlying problem. An indemnity is a promise to reimburse pound for pound on a specified risk, usually one diligence has already found, such as a live tax enquiry. It bypasses those hurdles entirely. When a buyer asks to convert a warranty into an indemnity, they are asking for a materially better remedy, and it should be negotiated as such.
The selling shareholders personally, not the company. On a share sale the company is the asset being bought, so a warranty from the company would leave the buyer suing an entity it now owns. Liability therefore sits with you as an individual, payable out of the proceeds you have just received. Where there is more than one seller, the critical question is whether liability is joint and several, meaning each of you can be pursued for the whole amount regardless of your shareholding, or several only, capped at each person's share of the consideration. Sellers with unequal shareholdings should look at this line before almost any other in the agreement.
More than feels comfortable. The instinct is to keep the letter short so the firm reads as clean, and that instinct costs sellers money. Anything properly disclosed cannot afterwards found a warranty claim, because the buyer bought with knowledge of it. A disclosed problem is a priced problem; an undisclosed one is a claim waiting to be notified. In practice the matters sellers most regret leaving out are the ones they privately judged immaterial. Work through every warranty yourself and mark it true, true-with-qualification, or not true as drafted. You are the only person in the process who actually knows the answers.
Five, and the cap is not the most important. The cap sets maximum aggregate liability, usually a percentage of consideration, with tax and title warranties often carved out and capped higher. The de minimis stops trivial individual claims. The basket sets an aggregate threshold, and you want a true excess rather than a tipping basket where crossing the threshold makes the whole sum claimable. Time limits are typically shorter for general warranties and longer for tax. Conduct-of-claims provisions decide who controls a third-party dispute and whether the buyer can settle without your consent, which without proper drafting lets a buyer settle generously and send you the bill.
No, and treating it that way is expensive. W&I insurance puts a policy behind the warranties so the buyer claims against an insurer rather than against you, with your contractual liability reduced to a nominal amount. It is genuinely valuable where sellers are retiring and want a clean break, or where many small shareholders make individual recourse impractical. But underwriters price on the quality of the diligence and the disclosure process, and they exclude known risks entirely, because anything already identified is uninsurable by definition. A thin disclosure exercise produces a costlier policy with wider exclusions, leaving both the buyer and the seller worse protected than a properly run process would have.
