Mythbusting: Sellers don’t need to worry about risk after completion

There is a persistent belief among SME sellers that once the deal is done, the money is in the bank, and the keys have been handed over, the risk is behind them. It is one of the most common misconceptions in business sales, and one of the most potentially costly.

Completion is not the end of the legal story. For most sellers, it marks the beginning of a period during which a range of legal and financial obligations remain live. Understanding what those obligations are, and how to limit them, is not a detail to leave to the final stages of a transaction.

Warranty claims don’t stop at completion

In any business sale involving warranties, the seller’s liability does not end at completion. Warranties given in the sale and purchase agreement remain enforceable for the limitation period agreed in the contract, commonly between 18 months and three years for general warranties, and longer for tax-related matters.

If the buyer discovers, after completion, that a warranty was untrue, for example that the accounts were inaccurate, that a key contract had an undisclosed problem, or that an employment liability was not disclosed, they can bring a claim against the seller. Depending on the size of the loss, this can represent a significant financial exposure.

The limitation period does not start to run from the date an issue is discovered. It runs from completion. A buyer who discovers a warranty breach three years after completion, but within the agreed limitation window, still has time to bring a claim.

Tax covenants

Tax liabilities are almost always treated separately from general warranties, and for good reason. HMRC has longer enquiry windows than the standard limitation periods for commercial warranties, and historic tax positions can remain uncertain for several years after a transaction.

A tax covenant (sometimes called a tax deed) is a standard feature of most corporate transactions and provides the buyer with direct protection against pre-completion tax liabilities that crystallise after the deal closes. From the seller’s perspective, this covenant represents a continuing exposure, typically for a period matching the relevant HMRC enquiry window, which for certain types of filing can be up to six years or more.

Deferred consideration and earn-outs

Where the transaction structure includes deferred consideration, a portion of the purchase price paid after completion linked to the business’s future performance, the seller has an ongoing commercial relationship with the buyer and the business for the duration of the earn-out period.

This can create disputes about how the business is being managed, whether the earn-out targets are being calculated fairly, and whether post-completion decisions by the buyer are affecting performance metrics in a way that prejudices the seller. The terms of the earn-out arrangement, including what protections the seller has in respect of how the business is run, need to be carefully negotiated before completion.

Post-completion restrictive covenants

Following a business sale, sellers are commonly required to give undertakings not to compete with the business they have sold, not to solicit former customers or employees, and not to make disparaging statements about the buyer or the business. These restrictive covenants, which typically run for between one and three years’ post-completion, are enforceable obligations. A breach can result in injunctive proceedings or a claim for damages.

Limiting post-completion risk

None of these obligations make a business sale a bad outcome for a seller, but they do need to be understood and managed properly. The best way for a seller to limit post-completion exposure is to:

• Ensure full and accurate disclosure has been made against the warranties before completion, reducing the scope for future warranty claims
• Negotiate appropriate limitations on warranty liability, including caps, time limits, and minimum claim thresholds
• Understand the scope of any tax covenant and, where possible, seek to limit it to matters within the seller’s knowledge
• Take legal advice on any earn-out or deferred consideration provisions to ensure they are fair and include appropriate seller protections
• Understand the precise scope and duration of any post-completion restrictive covenants before signing

Speak to the K3 Law team

K3 Law advises sellers throughout the entire transaction process, including on their post-completion obligations and how to structure the deal to manage ongoing exposure. Our contingent fee structure means our interests are aligned with yours. We are motivated to get you to completion and to protect your position when you get there.

If you are preparing to sell or are already in a process, speak to the K3 Law team today.

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