Disclosure Letter (Business/Asset Purchase)

What is a Disclosure Letter (Business/Asset Purchase) and when should you use it?

This Disclosure Letter is issued by a Seller (or a Seller’s Solicitors) prior to the completion of the sale of its assets or business to a Buyer.

It is designed to protect the Seller from future claims by the Buyer under the warranties included in the business purchase agreement.

It is also a means of the Seller providing information to the Buyer that may be of particular interest to them about the business or assets being sold.

The Disclosure Letter will be closely linked to the warranties in the Asset Sale Agreement.

Warranties are a series of statements of fact (and sometimes statements of opinion) which the Seller warrants to be true.

If a warranty proves to be untrue then the Buyer has a potential claim for damages.

The damages will be whatever is required to place the Buyer in the position it would have been had the warranty been true.

Usually, this will be the difference between the actual market value of the business or assets and the value they would have been had the warranty been true.

The Disclosure Letter allows the Seller to make disclosure against the warranties and thus avoid a potential claim by the Buyer for a breach of warranty.

The Disclosure Letter will also be useful to the Buyer, alerting it to any “skeletons in the closet” that may not have been revealed during the due diligence process.

Such disclosures may prompt the Buyer to renegotiate the purchase price or require an indemnity from the Seller.

This letter is divided into three parts, an introduction, general disclosures, and specific disclosure.

The introduction clarifies the letter’s purpose and refers to the applicable business purchase agreement.

General disclosures are standard generic disclosures that could apply to any transaction, for example the Seller will disclose all information contained in any documents filed with certain public registries, e.g. Companies Registration Office  or the Intellectual Property Office two days prior to completion.

The Seller is therefore making it the responsibility of the Buyer to search various public registers and the Buyer is deemed to have knowledge of all matters that would have been disclosed had they conducted such searches.

This would form part of the due diligence process where the Buyer investigates the Company’s financial, tax and sometimes commercial affairs.

You will find our due diligence enquiries template useful for this.

This disclosure letter can be used with our Business Sale and Purchase Agreement

You might also want to consider using our Heads of Terms (Asset Sale) template to agree principal terms for a purchase or sale of assets before entering into a more formal and binding agreement.