Guarantees and Indemnities

The acquisition process is characterised by several fixed elements. Buyer and seller making agreements. What is the difference between a guarantee and an indemnity?

Guarantees

A guarantee is a statement by the selling party as to the condition of the business at the time it is sold or on a specified date. An example of a guarantee is that the balance sheet has been drawn up correctly, that there are no unknown (legal) claims, that the information about the staff is correct, that the properties belongs to the company and are not pledged or seized, that all information provided is correct, etc. Which guarantees are agreed on often depends on the results of the investigation into the company, i.e. the due diligence. Click here to read more about the importance of a due diligence investigation. These guarantees are important confirmations to the purchasing party. The selling party must ensure the guarantees are correct. If it turns out that one or more guarantees are not correct, the seller will be in default with immediate effect and is obliged to pay compensation for the resulting damage. Often, agreements are made about the extent of the seller’s liability. Agreements can also be made about the minimum extent of claims or a maximum period during which the purchasing party can submit a claim. Guarantees are primarily intended to distribute the risks of purchasing a company: what risks are borne by the selling party (everything for which a guarantee is issued) and which by the buying party (everything for which no guarantee is issued). During the acquisition, risks can be divided that are not yet known or the consequences of which are not yet known.

Indemnity

Indemnities are agreements between parties in which a known risk or problem is (usually) borne by the selling party. This, for example, may concern ongoing proceedings by a creditor, a dispute with the tax authorities, a product defect or, for example, soil contamination the selling party is already aware of. These risks often emerge from a due diligence investigation. That is why thorough due diligence is important before purchasing a company. Although the risk or the extent of the damage is not yet known, the parties involved can make agreements about what will happen if the problem manifests itself or if the extent of the damage has become known. This is arranged through an indemnity. The parties agree that the seller bears that specific risk and compensates the consequences thereof to the seller or to the company itself. Indemnities too are a distribution of risk. Unlike guarantees, however, indemnities concern risks that are already known to the parties. Our specialists will be happy to tell you more about what they can do for your deal in a no-obligation meeting.