What is a Seller's Warranty to You in the Purchase of a Business or Real Estate Transaction?

by Doug Perry
Broker, Capitol Commercial Real Estate

Oooo, that's a tough one -- not! In the simplest of terms, "it is telling the truth to the best of a seller's knowledge about the business or real estate being sold." Does that always happen? After all the sellers we've worked with I think they all have good intentions. As a safeguard to both parties the disclosures really help inform both parties of what is actually being offered for sale. Sometimes however one person's point of view isn't the same as someone else's opinion. Example: Does the business make money? Breaking it down, there is actual net income that an owner ultimately pays taxes on. In between the gross and the actual net are all the expenses. The seller in his "mind" is thinking of all the toys, trips, dinners out, get the picture of things he writes off as expenses and at the end of the tax return he shows a loss. Hmmmm, in his mind he made money but is that what the actual tax return shows?

Now comes the fun part, quoting from my original broker years ago when I was in training, "Our job is to try and forensically understand the mindset of the seller and separate fact from wishful thinking in their write-offs." Not bad. So when we are pouring over our seller's financials we are looking for items that would not be a reoccurring expense to a potential buyer. Any other expenses that are left in the profit and loss, P&L is considered money that was needed to make the net that was enjoyed. So you add back the "add-backs" to the net and it will give you a pretty good idea what the actual health of the business has been, not just for a year but for as many as three years.

As a buyer you would like to know if I bought this particular business what kind of warranties will I get? As members of the National. State and local Association of Realtors we use the contracts written by the association that have been the standard in the real estate industry for decades. In the actual listing agreement between the brokerage and the seller it states as follows:

"OWNER WARRANTY: Owner warrants the accuracy of the information furnished herein, and on the attached BDS, (Business Disclosure Statement) or as modified hereafter with respect to the Business, and Owner agrees to indemnify, defend and hold harmless Broker from all claims, costs, expenses, disputes, litigation, arbitration, judgements and awards arising from any incorrect information supplied by Owner or from any material fact that Owner knows but fails to disclose."

In short, we do not know if someone is lying but as you can tell there is ____ to pay if they don't tell the truth not only to us but to the buyer as well. Consider it an insurance policy. This paragraph just reminds people to be straight-up in their dealings. So, our job is to get as much information as we can on every project to help the buyers make good decisions.

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