In brief - There are various methods of reducing risk when
acquiring a business
The methods for reducing risk when buying a business include
conducting due diligence to identify any potential problems,
excluding particular assets and/or liabilities from the
acquisition, obtaining warranties from the seller in relation to
the business and obtaining indemnities from the seller in relation
to specific liabilities.
Due diligence assesses the risks and opportunities associated
with a proposed transaction and serves to confirm all material
facts in relation to a sale. Generally, the purpose of due
diligence in the context of an acquisition is to assist the buyer
in assessing the level and nature of legal risk to be acquired.
This information may have a large impact on the sale price and
other terms of the sale agreement. Where problems are identified,
these can be dealt with by excluding the relevant asset, obtaining
an indemnity or reducing the sale price.
Due diligence will focus on the material commercial, financial
and legal issues affecting the seller's business. The buyer and
its financial, legal and other specialist advisers may prepare a
due diligence report which is sometimes provided to the bank which
is financing the deal.
Excluding certain assets and liabilities from the
To manage and minimise risk, a business sale agreement may
typically include an exclusion of liability provision. By excluding
certain assets from the acquisition, the buyer may avoid the
possibility of becoming liable for any of the seller's
undisclosed or unknown liabilities which are linked to those
Warranties are generally representations made by the seller
about the business. A sale agreement will usually contain
warranties relating to all of the assets being acquired.
The purpose of warranties is to:
Create a mechanism for adjusting the purchase price
Create a mechanism for sharing risk
Protect the buyer against undisclosed liabilities
Warranties are usually limited contractually by the seller and
are qualified by information disclosed to the buyer. As well as
limiting the number of warranties provided, the seller may seek to
limit the time period and/or the dollar value of warranties.
Indemnities are intended to protect one party from a specific
liability and to reimburse that party for a specific loss. Claims
under indemnities are usually not qualified by disclosures or
restricted by contractual limitations.
Indemnities serve to increase the scope for which damages are
recoverable by the buyer, as claims under indemnities are made on a
dollar for dollar basis and are usually not restricted by the rules
for contractual claims like warranties.
No substitute for legal advice
The dictum 'buyer beware' is never more apt than when
you are considering buying a business. Those who live to regret
purchasing a business have typically been swept away by the romance
of a particular scenario and have not considered the proposed
acquisition objectively before deciding to proceed.
If you are considering buying a business, obtaining advice from
a lawyer who specialises in business acquisitions is the most
foolproof way to safeguard your position and save yourself from
making a bad decision.
Swaab Attorneys was the highest ranking law firm and the
13th best place to work in Australia in the 2010 Business Review
Weekly Best Places to Work Awards. The firm was a finalist in the
2010 BRW Client Choice Awards for client service and was named the
winner in the 2009 Australasian Legal Business Employer of Choice
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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