Asset warranty

An asset warranty is a specific representation and warranty in a sale agreement in which the seller commits that the assets sold exist, are owned free of encumbrances, are fit for their intended purpose and are accurately valued at the figures stated in the financial statements. It is broader than a simple balance sheet warranty and may cover intellectual property, receivables quality, inventory condition, real estate title and technology functionality. Asset warranties interact directly with the results of financial due diligence: items identified in due diligence as risks are either negotiated out of scope, price-adjusted or covered by specific indemnities.

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Example: in the acquisition of a Swiss software company for CHF 9.0 million, the buyer requires specific asset warranties on the ownership and freedom from encumbrance of the three core software licences (valued at CHF 4.0 million in the PPA). During due diligence, one licence is found to contain a third-party co-ownership clause; this is resolved by a price escrow of CHF 600,000 pending licence clearance.

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Hectelion assists clients in quantifying asset warranty exposures and structuring appropriate contractual protections.