Walking away from a £1m+ business sale: the warranty that cost the buyer the deal

At a glance

We acted for the owner of an Essex construction company on a proposed share sale for a price in excess of £1m, on a cash-free, debt-free basis with a normalised working capital adjustment. The deal did not complete. The buyer's solicitors included warranties in the share purchase agreement that were not standard, one of which would have made the seller liable if the company did not have enough cash to cover twelve months of trading after completion. When the problem was pointed out, the buyer would not take ownership of it, and the seller decided he could not trust the buyer enough to continue.

The client and the objective

The seller wanted to exit the business and take on a new challenge. He was ready to give the normal warranties about the company's accounts, contracts, employees and compliance, and to stand behind them with the usual caps and time limits. He was not willing to underwrite the buyer's future trading.

The deal as proposed

• Share sale of the entire issued share capital to a trade buyer.
• Price in excess of £1m, cash-free and debt-free, adjusted for normalised working capital.
• Change-of-control consents needed from a number of the company's clients.
• Buyer represented by its own solicitors.

Why it did not complete

A warranty about the future, not the present

Warranties are statements about the company as it stands at completion. The buyer's draft included a warranty that the company held enough cash to fund twelve months of trading. That is not a statement of fact about the present; it is a guarantee of the buyer's own working capital after it takes over, and had it gone unnoticed the seller could have faced a claim for hundreds of thousands of pounds if the business, under new ownership, ran short of cash for any reason. The price already included a working capital adjustment designed to deal with exactly this, so the warranty would have made the seller pay for working capital twice.

The response that ended the deal

We struck the warranty and explained why. A buyer acting in good faith usually accepts the point or explains what it was trying to achieve. This buyer did neither: it neither withdrew the warranty cleanly nor took responsibility for having included it. For our client, the issue stopped being about one clause and became about whether he could trust the buyer through completion and the warranty period afterwards. He decided he could not, and withdrew.

Outcome

The sale was aborted before exchange. The seller retained the company and is free to sell to another buyer, with the benefit of the due diligence and disclosure work already done. Legal costs were limited by the fixed fee agreed at the outset.

What this deal shows

• Read every warranty for what it actually promises; a sentence that looks technical can be a guarantee of the buyer's future.
• A working capital adjustment and a cash warranty should never both appear in the same agreement.
• How a buyer behaves when caught overreaching tells you how it will behave when it has your warranties and your deferred consideration in its hands.
• Walking away is a legitimate outcome, and a fixed fee makes it an affordable one.