Warranties and Indemnities When Selling Your SME: Scope, Duration and Points to Watch

Are you considering selling your SME in French-speaking Switzerland and have heard of “warranties and indemnities” without fully grasping what they mean for you in practice? You are not alone. This contractual mechanism, unavoidable in the vast majority of company sales, often raises questions — and even a degree of apprehension — among business owners preparing to hand over. This article explains how it works, its key parameters and how good preparation allows you to approach this step with peace of mind.

Preliminary note: this article is an informative overview intended for SME owners. It does not in any way constitute legal or tax advice. Before taking any decision, consult a qualified lawyer and tax adviser.

1. Why the statutory warranty under the Swiss Code of Obligations is not enough in a share deal

When you sell your company by selling your shares — what is known as a share deal — you are legally selling securities, not directly the company's assets or contracts. This is a fundamental nuance that many sellers underestimate.

The Swiss Code of Obligations does provide a statutory warranty for sales (art. 197 et seq. CO). But this protection relates mainly to the shares themselves: their existence, their validity, the absence of encumbrances on them. It does not cover, or covers only very imperfectly, the actual position of the company whose share capital you are selling.

In other words, if a tax reassessment arises six months after the sale for a financial year prior to it, if an employment dispute breaks out with a former employee, or if an unrecorded debt surfaces on the balance sheet, the acquirer cannot simply rely on the statutory warranty under the CO to obtain redress. It is precisely to fill this gap that the parties negotiate a contractual warranty agreement, also known as warranties and indemnities, or “representations and warranties” (representations and warranties).

To better understand the legal structure within which this mechanism operates, you can read our dedicated article: Share deal or asset deal: understanding the two structures for selling an SME.

2. What warranties and indemnities are and what they actually cover

Warranties and indemnities take the form of a clause — often a stand-alone document annexed to the sale agreement — by which the seller warrants the accuracy of the company's position at a reference date, generally that of the last closed balance sheet, and undertakes to indemnify the acquirer if a liability originating before the sale materialises after it.

In practice, these warranties cover several areas:

• Accounting and financial: accuracy of the accounts, absence of unrecorded debts, fairness of the reference balance sheet.
• Tax: tax returns filed and compliant, absence of ongoing or foreseeable reassessments, VAT correctly handled.
• Employment and social security: compliant employment contracts, social security contributions up to date, absence of undisclosed employment disputes.
• Legal and contractual: validity of customer and supplier contracts, absence of ongoing disputes or change-of-control termination clauses.
• Environmental and regulatory: compliance with operating permits, absence of hidden environmental liabilities.
• Intellectual property: ownership of the trademarks, patents and software used by the company.

If any of these warranties turns out to be inaccurate after signing, and the acquirer suffers a financial loss as a result, the acquirer can invoke the warranty and claim compensation from the seller, in accordance with the terms set out in the contract.

It is important to understand that warranties and indemnities are not a penalty imposed on a seller acting in bad faith. They are above all a mechanism for allocating risk: they allow the acquirer to pay the price of a sound company while having recourse if hidden elements were to call that value into question.

3. The key parameters to understand and negotiate

Warranties and indemnities are not a standardised document. Their parameters are negotiated between the parties, and it is essential that you understand them before entering that discussion.

The cap

The cap sets the maximum amount the seller undertakes to pay under the warranties. It is generally expressed as a percentage of the sale price. In SME transactions, this cap frequently sits between 20% and 50% of the price, depending on the nature and extent of the risks identified during due diligence.

A well-calibrated cap protects the seller against unlimited exposure while giving the acquirer meaningful cover.

The trigger threshold and the de minimis

To prevent the warranties from being triggered for negligible amounts, the parties generally provide for:

• A de minimis: a threshold below which an individual claim is disregarded (for example, no claim below CHF 5,000 can be brought).
• A basket (or overall deductible): the aggregate of claims must exceed a certain threshold before the warranties apply, thereby avoiding multiple claims for modest amounts.

These parameters protect the seller and are an important negotiating lever.

The duration of the warranties

The period during which the acquirer can invoke the warranties varies according to the nature of the risks covered:

• General warranties: 12 to 24 months after the closing date, which corresponds to the time needed for a first post-acquisition audit to reveal any anomalies.
• Tax and social security matters: the duration is often aligned with the limitation periods applicable under Swiss law, which can reach 5 to 10 years depending on the taxes concerned. This longer duration is logical: a tax reassessment can occur several years after the end of the audited financial year.
• Specific warranties: for certain risks identified during due diligence (an ongoing dispute, an environmental warranty), a bespoke duration can be negotiated.

Security backing the warranties

Warranties and indemnities are only worth something if the seller is able to honour their commitments. That is why the parties often provide for security mechanisms:

• Escrow account: part of the sale price is deposited with a trusted third party (notary, bank) and released progressively as the warranty periods expire.
• Price retention: a fraction of the price is paid on a deferred basis, forming a warranty reserve.
• Bank guarantee: a bank undertakes to pay on first demand if the warranties are invoked.

The choice of mechanism depends on the mutual trust between the parties, the size of the transaction and negotiated practice. A direct sale to a single acquirer, with an established relationship of trust, can sometimes simplify these mechanisms compared with more competitive processes.

4. How a well-prepared seller limits their exposure

The best way to reduce the extent of the warranties you will be asked to give is to come to the negotiating table with a company whose position is clear, documented and free of grey areas.

Here are the concrete actions that make the difference:

• Recent annual accounts, audited or reviewed: a balance sheet prepared by a recognised auditor is a solid basis for the reference date. It reduces the risk of subsequent challenge.
• Up-to-date and rigorous bookkeeping: all debts, provisions and off-balance-sheet commitments must be correctly recorded or mentioned in the notes.
• Up-to-date tax returns: having met your tax obligations with no arrears or open files is a considerable asset when negotiating the duration and cap of the warranties.
• Formalised and archived contracts: employment contracts, commercial leases, customer and supplier contracts, licences — all must be available, signed and filed.
• An exhaustive list of known disputes and risks: it is better to disclose them yourself, with a clear history, than to let the acquirer discover them. A disclosed and documented risk can be excluded from the scope of the warranties or dealt with through a specific provision.

To find out which documents to gather before entering a sale process, see our practical guide: Which documents to prepare to sell your SME in French-speaking Switzerland.

5. The central role of transparency and documentation

Warranties and indemnities sit within a broader context: that of the due diligence carried out by the acquirer before the contract is signed. The more complete and rigorous your data room, the more reassured the acquirer will be — and the less they will need to protect themselves through extensive clauses.

Transparency is not a weakness when selling an SME. On the contrary, it is a strong signal of seriousness and good faith that speeds up the transaction, strengthens mutual trust and often leads to more balanced warranty terms.

In practice, sellers who have anticipated due diligence — often with the help of an external adviser — obtain better-defined warranty scopes, higher de minimis thresholds and better-calibrated durations. They spend less time negotiating and reduce the risk of the transaction stumbling over technical points.

Warranties and indemnities also form part of the overall sale timetable, alongside other structuring documents such as the letter of intent. To understand what this preliminary document contains and how it prepares the ground, read our article: The letter of intent: what this key document contains when selling your SME.

In summary: what you need to remember

• In a share deal, the statutory warranty under the CO does not cover your company's actual position: a contractual warranty agreement is therefore almost systematic.
• Warranties and indemnities commit the seller to indemnifying the acquirer for any pre-sale liability that comes to light after the sale.
• Their parameters — cap, de minimis, duration, security — are negotiable and must be understood before anything is signed.
• The duration for tax and social security matters is generally longer, aligned with the applicable limitation periods.
• Rigorous preparation (up-to-date accounts, complete documentation, transparency about risks) is the best way to limit your exposure as a seller.

Warranties and indemnities are not an obstacle to selling your SME. Properly understood and properly negotiated, they provide a secure framework for both parties — and a mark of seriousness for a transaction conducted in the best possible conditions.

Important reminder: this article is an informative overview of warranties and indemnities in the context of an SME sale in French-speaking Switzerland. It is in no way a substitute for personalised legal or tax advice. Before taking any decision relating to the sale of your company, we strongly recommend that you consult a lawyer specialising in company law and a qualified tax adviser.