Handling Warranties and Indemnities in the Contract

When selling your business, the small print can make or break your deal—and nothing is scrutinised more than warranties and indemnities. These clauses shift risk, shape your liabilities, and are a focal point for disputes after sale. This guide demystifies exactly what warranties and indemnities are, how they work in UK business sale contracts, and gives you practical, expert advice on protecting yourself while keeping your buyer confident. If you want to sell your business smoothly and sleep at night afterwards, read this before you sign anything.

Warranties and indemnities are two of the most critical—and misunderstood—tools in any UK business sale contract. They don’t just pad out the paperwork: they define who carries the can if something goes wrong after completion. In essence, warranties are promises made by the seller about the state of the business, while indemnities provide compensation for specific risks.

A warranty is a contractual statement of fact about the business. For example, you may warrant that all accounts are accurate, that there are no outstanding disputes, or that all tax has been paid. If these statements turn out to be untrue, the buyer may have grounds to claim damages. Warranties encourage sellers to fully disclose issues and give buyers confidence in what they’re acquiring.

Indemnities, on the other hand, are promises to compensate the buyer for specific losses if certain events occur—typically, where the risk is known or suspected. For instance, you might give an indemnity for an ongoing tax investigation, or for potential claims from a dismissed employee. Indemnities usually offer the buyer a pound-for-pound recovery, making them a much sharper tool than warranties.

For most small business owners, selling up is a rare event—maybe once in a lifetime. The sale agreement is likely to be the most complex contract you’ll ever sign. Warranties and indemnities are central because they allocate risk between seller and buyer, and can have huge financial consequences after the deal is done.

Buyers rely on warranties to ensure they are getting what they pay for. If a warranty turns out to be untrue, buyers can claim compensation for their losses. Indemnities, meanwhile, are usually demanded where a buyer has identified a specific risk but cannot quantify it or wants greater protection.

From a seller’s perspective, the breadth and depth of warranties and indemnities directly affect your exposure to future claims. Poorly drafted or overly broad clauses can leave you open to claims long after you’ve moved on. It's not just about honesty—minor mistakes, forgotten issues, or misunderstandings can all trigger claims.

Most sale agreements for UK businesses contain a suite of warranties covering all key aspects of the business. The bigger or riskier the deal, the more comprehensive the warranties. Typical areas covered include accounts and finances, tax, contracts, employees, litigation, intellectual property, property, and compliance with laws.

Indemnities are usually narrower in scope, focused on particular risks identified during due diligence. Common examples include unresolved tax liabilities, environmental risks, or ongoing litigation. The buyer may also request indemnities for any issues you disclose in the disclosure letter that could still result in loss.

It’s worth noting that in asset sales (where only some assets are transferred, not the whole company), warranties and indemnities are often less extensive than in share sales, but this is not always the case. Always check how your specific deal is structured.

Negotiation is where theory meets reality. Buyers want the broadest possible warranties, with few limitations—essentially, maximum protection. Sellers, in contrast, aim to restrict the scope and duration of warranties and to limit or avoid indemnities wherever possible.

A common sticking point is materiality—buyers want warranties that cover all issues, however minor; sellers want thresholds so only significant issues give rise to claims. The parties will also negotiate time limits for bringing warranty claims (often 2 years for general warranties, up to 6 years for tax), and financial caps on liability (sometimes as high as the purchase price, but often much less).

Indemnities are typically the toughest to negotiate because they can expose the seller to unlimited loss. A savvy seller will push to restrict indemnities to specific, known risks, and to cap their amount and time period. A strong set of disclosures can also reduce exposure.

• Buyers often ask for warranties to 'flush out' undisclosed problems.
• Sellers should prepare a thorough disclosure letter to limit liability.
• Time limits for warranty claims are negotiable—push for the shortest you can.
• Indemnities should only cover clearly identified, specific risks.
• Warranties can be qualified by knowledge—define whose knowledge counts.

The drafting of warranties and indemnities, and the associated disclosure process, is where your legal adviser earns their fee. Every factual statement in the warranties must be checked—and if you know of anything that isn’t 100% true, it must be disclosed in the disclosure letter. This letter is a formal document that lists all exceptions to the warranties.

Why is this so important? Disclosing an issue prevents the buyer from claiming for it later unless you’ve given an indemnity. For example, if you disclose in the letter that a customer contract is about to end, the buyer cannot sue you later for breach of a warranty about ongoing contracts.

You can also limit your liability by negotiating caps (a maximum sum payable), de minimis thresholds (claims below a minimum amount are ignored), baskets (claims only paid once they exceed a total threshold), and time limits. Always ensure any indemnity is tightly drafted—no open-ended language, and with clear triggers.

• Prepare the disclosure letter with your solicitor—do not rely on memory.
• Check every warranty line-by-line and disclose any exceptions.
• Negotiate for financial caps and de minimis thresholds.
• Time limits for claims are critical—never leave these open.
• Review all indemnity wording for clarity and scope.

After completion, if the buyer believes a warranty or indemnity has been breached, a claims process begins. Under UK law, the buyer must usually notify you in writing that they intend to make a claim, stating the nature of the breach and the loss suffered (for warranties), or the amount claimed (for indemnities).

For warranty claims, the buyer has to prove there was a breach and that it caused quantifiable loss. This can be time-consuming and, in practice, many claims are settled out of court. Indemnity claims are more straightforward—if the event specified in the indemnity occurs, the seller usually pays out, often without the buyer having to prove loss.

Most sale agreements include a detailed claims procedure, including requirements for timely notice, supporting evidence, and dispute resolution (often arbitration or mediation). It’s crucial to follow these processes exactly; late or poorly drafted claims may be invalid.

• Buyer must notify the seller of claims in writing and within the time limit.
• Warranty claims require proof of both breach and loss.
• Indemnity claims are usually 'pound for pound'—no need to prove breach.
• Dispute resolution processes (mediation/arbitration) are common.
• Late or poorly formulated claims can be thrown out.

For most small business owners, the goal is clear: sell the business, get paid, and avoid future liabilities. Achieving this means being proactive, thorough, and realistic about the risks. The best protection is preparation; surprises during due diligence or after the sale almost always lead to tougher indemnities or price reductions.

Start with a business health check before you go to market. Identify any potential problems—tax, contracts, staff disputes—and fix or disclose them. Work with an experienced solicitor to draft warranties and indemnities that accurately reflect your business, and push for reasonable caps and time limits.

Be honest—deliberate concealment can lead to claims for fraud, which are not limited by any caps or time limits. And remember, buyers are increasingly using warranty and indemnity insurance to manage risk; this can also be a tool to help unlock difficult negotiations.

UK market practice for warranties and indemnities has evolved in recent years, especially as buyers and sellers have become more aware of the risks and as deals are more frequently backed by external investors or lenders. According to the British Private Equity & Venture Capital Association (BVCA) and figures from the UK M&A market, the vast majority of deals now include a broad suite of warranties and at least some indemnities—particularly in share sales.

Warranty & indemnity (W&I) insurance is now widely used in deals over £1m, and increasingly filtering down to smaller deals. This insurance can cover the buyer for losses arising from breaches, in exchange for a premium (typically 1-2% of deal value). Sellers may offer to fund or split the cost of W&I insurance to cap their own risk, but this is not yet universal in transactions under £5m.

Typical liability caps for general warranties in UK SME sales are 10-30% of the purchase price, with higher caps (sometimes 100%) for tax warranties and specific indemnities. Time limits are usually 12-24 months for general warranties, and 6-7 years for tax. However, every deal is unique—your negotiation will reflect the risk profile of your business and the buyer’s appetite for risk.

• W&I insurance is now an option for deals as small as £1m.
• Buyers expect detailed warranties on tax, employment, and intellectual property.
• Shorter warranty periods (12-18 months) are common for healthy, low-risk businesses.
• Indemnities are hardest to negotiate—limit them to known, quantified risks.
• Disclosure quality has become a deal-breaker in UK transactions.

Many small business owners underestimate just how much risk can be hidden in warranties and indemnities. The most frequent mistake is signing up to broad, unqualified warranties without proper disclosure. This leaves you exposed to claims for issues you didn’t even realise existed.

Another common pitfall is failing to cap or time-limit your liability, especially for tax or employment-related warranties. If you sign a contract with unlimited or poorly defined indemnities, you could be on the hook for large sums years after completion—even if you acted in good faith.

Never ignore the disclosure process. It’s not a formality—if you forget to disclose an issue, it’s fair game for a claim. And beware of relying on so-called 'standard' documents or online templates; business sales in the UK are too complex and too high-stakes for one-size-fits-all solutions.

• Don’t sign warranties you don’t understand or can’t verify.
• Never leave warranties or indemnities uncapped unless absolutely necessary.
• Disclose every known issue, however minor it seems.
• Watch for 'entire agreement' clauses—they can override side promises.
• Get every change agreed in writing—verbal assurances are worthless.