The disclosure letter: how UK sellers manage warranty risk in an exit

Why this matters separately from the warranties themselves

Most explainers on warranties and indemnities focus on what those clauses promise and how insurance can cover them. Less is said about the document that quietly does the real work of limiting a seller’s exposure: the disclosure letter. If you are a founder selling your company, the disclosure letter is arguably the single most important document your lawyers draft during the deal, because it is what stands between a warranty breach and a genuine claim against you.

What a disclosure letter actually does

When a seller gives warranties in a share purchase agreement, they are stating that certain things are true about the business, for example that there is no ongoing litigation, that all material contracts have been provided, or that the company holds no undisclosed liabilities. A disclosure letter is the seller’s chance to qualify those statements. It sets out specific facts, documents or circumstances that the buyer is told about before signing, which then sit outside the scope of what can later be claimed as a breach.

The logic is straightforward: a buyer cannot reasonably sue for a warranty breach over something it already knew about. If the disclosure letter tells the buyer that a customer contract is under review, or that a former employee has lodged a grievance, and the buyer proceeds with the deal anyway, that specific issue is generally carved out of any future warranty claim.

General disclosure versus specific disclosure

Disclosure letters typically contain two layers. General disclosure covers things a buyer could have found through reasonable due diligence, such as matters on the public record at Companies House or in Land Registry filings. Specific disclosure lists particular facts against particular warranties, usually cross-referenced to documents in the data room.

Buyers and their lawyers push hard to narrow general disclosure, because a broad general disclosure clause can let sellers argue that almost anything a buyer could theoretically have discovered is disclosed and therefore excluded from a claim. Sellers push the other way, wanting general disclosure to be as wide as possible. Where this line lands is one of the most fought-over points in negotiating the sale agreement, and it materially changes how much protection the warranties actually give the buyer after completion.

Why founders should not treat this as a lawyers-only exercise

It is tempting for a founder mid-exit to leave the disclosure letter entirely to advisers, especially when the process is already consuming time that should be going into running the business. That is a mistake. The founder and management team are usually the only people who actually know about the messy, half-resolved issues sitting in the background of any growing company: the supplier dispute that never quite got formalised, the contractor who was really an employee, the software licence that lapsed and was never renewed.

If those issues are not captured properly in the disclosure letter, they are not protected. A warranty claim brought after completion over something the founder knew about but never disclosed is one of the more common and most painful disputes in UK private M&A, and it can eat into consideration that has already been spent.

How this interacts with warranty caps and time limits

Disclosure works alongside, not instead of, the other protections sellers negotiate into a sale agreement, such as financial caps on liability, minimum claim thresholds, and time limits after which a warranty claim can no longer be brought. A well-drafted disclosure letter reduces the pool of matters that could ever become a claim in the first place, while caps and time limits control what happens to whatever is left. Founders selling with the benefit of warranty and indemnity insurance still need a robust disclosure process, because insurers will not cover matters that were fairly disclosed before signing; those stay with the seller or fall outside the policy entirely depending on how it is structured.

Practical steps for founders approaching this stage

Start the disclosure exercise early rather than in the final rushed days before signing. Go through each warranty in the draft agreement line by line with your management team and ask honestly whether anything in the business touches on it. Keep the data room organised and properly indexed, since specific disclosures are usually cross-referenced to documents held there, and a missing or mislabelled document can undermine a disclosure that was otherwise valid. Get your corporate lawyer to negotiate the general disclosure wording as carefully as the financial terms of the deal, because it has a direct bearing on your risk after the money has landed.

Where to check current practice

Disclosure letter practice and standard market wording shift over time, and the detail depends heavily on deal size and sector, so founders should work with a solicitor experienced in private company M&A rather than relying on templates. The Law Society and the SRA both maintain guidance on instructing corporate lawyers and what to expect from the conveying of risk in a sale process.