A disclosure letter is sent by the seller of a business to the buyer to qualify (and therefore limit) the warranties that have been provided to the buyer in the business sale contracts.
Why a disclosure letter is beneficial
The statements that are contained within a disclosure letter can actually be beneficial to both the buyer and the seller. They benefit the seller as they allow them to put on record any information regarding the company at the time of the deal. If an issue is highlighted by the seller in the disclosure letter and accepted by the buyer at the time of the deal then they will find it very difficult to make a warranty claim against the seller later on.
However, the disclosure letter can also be beneficial for the buyer too as they can bring information out of the wood work which can be considered prior to the deal going ahead. This may prompt further questions and investigations by the buyer during the due diligence process.
The contents of the disclosure letter may be negotiated to some extent by both the buyer along with the contracts and warranties themselves. In general, by the time the disclosure letter has been signed and delivered it will have been review and accepted by the buyer and their advisers.
Posted by Daniel Atherton