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Exiting your business: Due diligence and contract negotiations

Before prospective purchasers commit to buying your business, they are going to try and find out as much as they can about it in a process called 'due diligence', which you should expect to last for a minimum of four weeks.

You need to decide on the extent of their access. You could, for example, allow them to interview the directors and senior management and visit your sites or, at the other extreme, restrict their access to information which you make available to them off-site.

The final contract will include warranties and indemnities. Many issues that are identified at the due diligence stage are resolved by using warranties or indemnities, but in practice, most warranties and indemnities are standard.

Warranties

Warranties are often included as a way for the purchaser to find out or confirm facts about the business. As an example, you might be asked to warrant that the business was not in any dispute with the tax authorities. If you are, in fact, in such a dispute, you would need to make a disclosure against the warranty. If you do not make a required disclosure against a warranty then the purchaser can claim damages by bringing an action for breach of contract, and the amount of damages payable is determined by the purchaser's loss. It is much more difficult to claim damages under warranties than under indemnities.

Indemnities

Indemnities are promises that you will make payments to the purchaser in certain circumstances. Common tax indemnities include promises to pay any tax liabilities which arise in the acquired company because of the previous relationship with the vendor, or underpaid tax, interest or penalties relating to returns filed by the vendor.

If you are selling a business for the first time, you may be surprised how many points of contention arise at this stage. It is necessary to be extremely attentive to detail to ensure that the contract that you will sign accurately represents the terms that you have agreed. You should be involving not only your lawyers in agreeing the contract but also your tax advisers, who will be attuned to the tax implications of any proposed changes to the terms or structure of the deal.

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