Asset/Liability Guarantee for the transfer of SMEs

Asset/Liability Guarantees

A liability guarantee allows the buyer to protect themselves against future expenses that are not apparent in the company’s accounts that were used as the basis for the transaction. Examples of such expenses include:

• A guarantee invoked by a customer of the company on deliveries made before the transfer of the company
• Tax adjustments for the period before the transfer of the SME
• A trial of a competitor or employee for events that occurred before the sale

Of course, in most cases, this guarantee covers asset shortfalls. Examples of such asset shortfalls include:

• A doubtful debtor
• Missing stocks
• A dispute over a building
• A material item on the balance sheet

Guarantee of the Guarantee

For large cases, the buyer will request a payment guarantee if the liability guarantee is called upon. In practice, this guarantee can be given in the following ways:

• Part of the price is paid in advance and serves as a guarantee
• A bank guarantee is given by the seller

Specific Guarantees

In addition to the liability guarantees, the buyer may request guarantees on specific points, such as:

• Guarantees on the legality of the activity (including compliance with the laws, possession of administrative authorizations, ownership of shares, patents, trademarks, etc.)
• Guarantees against environmental risks

In practice, these warranties are given by the seller in the form of a series of representations contained in the assignment agreement.

The Procedure for Invoking Guarantees

It is essential to define very precisely the way in which the guarantee will eventually be invoked, including:

• Material organization (such as a registered letter, minimum threshold, deadline, prescription, etc.)
• The transferor’s right to control disputes (through a joint negotiation clause)
• Arbitration possibilities in the event of an appeal