In this episode, we dive deep into the world of selling businesses and provide valuable insights for sellers (and business brokers) who are negotiating warranties and indemnities. Together with special guest Chris Rolls Managing Director of PieLAB Capital, host Joanna Oakey shares some sage advice on how to navigate the overwhelming risk involved in reviewing warranties and explains the role transaction liability insurance can play in managing it.
Whether you’re a first-time seller or a seasoned professional, this episode is packed with practical tips and advice to help you negotiate a fair and reasonable set of warranties and indemnities, and successfully sell your business.
In our Ask Me Anything sessions are where our host, Joanna Oakey answers your questions, these are the questions that have been provided by you as the listeners or along the way in our day-to-day practice. If you would like to submit a question that you’d like us to answer, then please send it to us at [email protected].
Episode Highlights:
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- 0:15 What’s your advice to sellers of businesses when it comes to negotiating a fair and reasonable set of warranties and indemnities?
- 1:00 The reason why sellers usually get overwhelmed by the risk in their mind as to the warranties that they read through
- 3:35 Transaction Liability insurance
- 5:35 How should a seller of a business choose the right lawyer to represent them in the transaction and what should they avoid?
- 6:47 How to choose a lawyer – choosing a lawyer checklist
Connect with Chris Rolls:
Send us an Ask me anything question!
Relevant episode:
[EP 244] Entrepreneurship and positioning yourself for M&A success with Chris Rolls Part 1
[EP 245] Entrepreneurship and positioning yourself for M&A success with Chris Rolls Part 2
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iTunes: https://podcasts.apple.com/au/podcast/the-deal-room/id1267098895
Transcript below!
Note: This has been automatically transcribed so will be full of errors! We are not providing it to you as a word-perfect version of the podcast but just as an easy way to provide you with a different way to be able to scan for information that might be relevant to you.
Joanna:
Hi, it’s Joanna Oakey here and welcome back to The Deal Room Podcast, a podcast proudly brought to you by our commercial legal practice, Aspect Legal. Now today, we have a bit of a different show. We have our Ask Me Anything episode today. So these are questions that I have been provided by you as the listeners or along the way along the journey in our day-to-day practice that I want to provide answers to in a quick podcast session. Today, we have on the show Chris Rolls. Now if you have a question that you’d like me to answer, then please send it to us at podcasts at aspect legal.com.au. And we’ll put that link in the show notes. Now. Here we go with a very quick session for you.
Joanna:
Chris! Welcome on board, what are some of the questions that you hear that I can answer?
Chris:
Yeah, sure, Jay. So one of the interesting things that, you know, as we’ve discussed that we, we buy and sell businesses. In my experience, though, it’s very hard to sell a business without having to sign up for a set of warranties indemnities however, one of the things I found is that sometimes lawyers, particularly those that haven’t done a lot of sort of, you know, business transactions, they advise their clients to not to agree or to substantially change, what are pretty standard terms and conditions in terms of warranties and damage. So I’m interested in your advice on, you know, how you approach sort of the negotiation, and what your view on what sort of fair and reasonable warranties and attendees in a contract of sale is
Joanna:
such a good topic, because I find that sellers quite often have just not even turned their mind to these as they come into a sale. And sometimes, they in fact, I don’t even mean sometimes, almost always, they can be very overwhelmed by the risk in their mind as to the warranties that they read through because quite often these warranties, depending on the you know, the size of the contract, but they go for pages like this is the reality. And when you know, when we’re on by side, you know, we see the frustration that you’re talking about right now, with overly conservative lawyers or lawyers who just don’t understand what is a market, market practice in, in, you know, there’s a general approach, I guess, for m&a transactions. But it can also differ based on industries as well. So there can be different approaches from industry to industry. And one of the first things is, I think that open and honest conversation with a seller is a routine normal part of selling their business. And the warranties will look different depending on whether it’s a business sale transaction, which is an asset sale, or a share sale, obviously, it’s them understanding the reasons that a buyer requires them, I think that’s the very first thing that them understanding that it’s normal, conceptually, them understanding why a buyer would want them, but then them having full and frank discussions with them to understand where the real risk sits in their business from their perspective. And so so I guess it’s that general discussion, but then there’s always these elements that will be added into a contract that will help minimise the indemnity that is provided. So you know, we limit timeframe and timeframe, often cut up between various types of warranties that sit in the contract. And then we also will have caps, and then we’ll have thresholds, and there are all these sorts of things to contain, the way in which it works. And I think my experience is, as you work sellers through these areas as you talk about the commercial reality of them, and then you talk about the protections that are put there but that are commercial. You really sellers get into that mindset of understanding. And I think one of the other things that we talked about with our sellers as well as transaction liability insurance is warranty and indemnity insurance. There’s some great new insurance in the marketplace here in Australia. That is very in this warranty and indemnity insurance used to be extremely expensive and used to be more a buy-side insurance, and certainly for the larger transaction sizes. That is still the case but for SMEs and deals. So you know, say our sales below that five to $10 million point, there are great insurance products on the market that are relatively cheap. In fact, they’re very cheap. They sell side by side, but they create a lot of for our very nervous sellers, which, you know, sometimes we have very nervous sellers with notwithstanding everything that we sort of work them through. And they were greatly comforted by the opportunity to get an insurance policy to protect them as well. So that’s the discussion that we have. And they’re the sorts of protections that we offer our sellers to consider, in order to feel not totally exposed.
Chris:
So I mean, I think, certainly one of the things I’ve seen is that there’s there is a set of what you said, kinda like market warranties, indemnities and other interesting things. I mean, I’ve, we’ve been acquiring businesses for a long time. And we have never once ever had any of the businesses we’ve acquired, claimed on any warranty or any indemnity. And I think sometimes people tie themselves in knots around all what happens if this happens, and what happens if that happens. Without sort of thinking about what’s the probability of that happening? You know, and that’s a really important, yes, that’s an
Joanna:
Absolutely brilliant point. Wonderful. And have you got any other Ask me anything questions?
Chris:
I do so. So on that note, so so so it’s kind of related? How should somebody choose the right lawyer to represent them? Because one of the things I’ve seen, instead of in our business is that, you know, people sort of think I’m selling my business, I’m gonna go to my, you know, my sort of my standard lawyer who helped me with my property lease last time. And sometimes we find that lawyers might not have had much experience in selling businesses or advising clients on the sale of businesses. So how would you advise someone to, you know, how to select a lawyer that’s going to represent their interests?
Joanna:
really good question, one that we’re asked a lot, actually. And so we, and I promise you, this is not a leading question that Chris is asking your question.
Chris:
It’s not I actually came up with it myself, because one of the things I find is that we say to people, hey, when you’re choosing your lawyer, make sure they’ve done some transactions. And of course, we can recommend those certain lawyers. But of course, they don’t want recommendations from us, because there’s, there’s a bias there. So it’s really good to get someone a third party like yourself to sort of say, well, we’re How would you choose? If you are a lawyer who specializes in this face? How would you choose?
Joanna:
Well, we have a choice a lawyer checklist that we have available for anyone who wants it. You’re absolutely right, the questions that you need to ask, or the information that you need to get is that understanding of how often the LOI has dealt with these types of transactions. So that’s absolutely critical. But simply asking them may not reveal the answers that you want. So there’s actually a series of questions that we have in this checklist. So it’s, you know, it relates to the frequency with which they deal in, in dealing with m&a Number one and dealing with in your industry number two. So that’s, I mean, we and I’ve put a lot of thought into that, because it’s an issue that we have seen again, and again. And once again, we see the issue as well, you know, the exact same issue that you’re seeing, because we always have counterparties. So lawyers act for the other side, every time we work on a transaction, and we see the very large variances in experience and understanding in the industry. And it’s a huge problem and something that we that we’re very keen on, we want to work on a transaction with lawyers on the other side who know what they’re doing in the area because it just makes it better for all around. I think that’s my perspective.
Chris:
Absolutely. Well, that’s one interesting thing a lot of people sort of think, well, you know, isn’t it worse? If we’re a buyer of a business? Business? Isn’t it better for us? If the lawyer on the other side is inexperienced? And the answer is no, we would much prefer an experienced lawyer on the other side, who’s done a, you know, a ton of these sorts of transactions because the process is quicker. There aren’t debates about things that actually don’t really matter. And the debate and discussion are about the things that actually do matter for both parties. And I feel that you know, when we’re dealing, you know when we’re acquiring a business with, you know, a seller who’s got good representation, that’s, that’s, that makes an enormous difference, and it increases the likelihood of the transaction going forward.
Joanna:
Brilliant. Wonderful. Well, thank you very much, Chris, and thanks for coming on to the podcast.
Chris:
No worries. Thanks, Joe. Good to be here.
Joanna:
Well, that’s it for our Ask Me Anything episode today. I hope you found that useful. Now we’ve got a few more of these damn podcasts coming up soon. I find it invaluable to be able to answer these top-of-mind questions whether they’re from our guests, our audience or our client. Now if you have a specific topic or question that you’d like us to discuss then submit your Ask Me Anything questions to [email protected] Or check out the show notes to this episode where we will link right through to an email for you to submit your Ask Me Anything questions and an important reminder that if you would like any legal assistance with matters that you’re working on at the moment, then don’t forget you can book in for an initial free call directly with our Legal Eagles at Aspect Legal by heading to our homepage at aspect legal.com.au Well, that’s it for me today. My name is Joanna Oakey, and you’ve been listening to another wonderful episode of our podcast proudly brought to you by our commercial legal practice Aspect Legal See you next time.
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