Limit your liability
Sellers of financial planning businesses should expect to give Warranties to the buyer in the sale agreement. Warranties are contractual representations about the business and its assets, and relate to matters such as (a) compliance with laws; (b)accurate record keeping; and (c) absence of litigation or client complaints.
Whilst it is reasonable for the buyer to seek Warranties in respect of the business that he is buying, it is also appropriate for the seller to negotiate limitations of his liability under those Warranties. The limitations of liability that we would commonly expect to see in a sale agreement for a financial planning business include the following:
1. A maximum liability cap (for example, the seller’s liability under the Warranties is capped at the amount of the sale price).
2. A “deminimis” claims threshold (for example, any Warranty claim must be greater than $10,000 before the seller is required to compensate the buyer).
3. A specific timeframe within which Warranty claims must be brought – for example, all Warranty claims must be brought within the period of 2 years following completion.
We have seen sellers who did not limit their liability in these ways suffer a significant “sting in the tail” when a claim is made months, or even years, after they have sold the business. Selling your business is a “license to get sued”, and sellers who limit their liability often sleep better at night!