Negotiating the Purchase Agreement

A purchase agreement transfers the ownership of a business and its assets. It replaces any previous agreements, such as a letter of intent or offer to purchase. 

The purchase agreement is sometimes signed before the closing occurs. However, a change of possession of the business doesn’t occur until the closing. Closing occurs when the bill of sale is signed and delivered to the buyer in the case of an asset sale or when the stock certificates are signed in the case of a stock sale. 

If the purchase agreement is signed prior to closing, contingencies may remain, such as approval by key third parties, including the lender, lessor, franchisor, or licensor. The sale is canceled if these contingencies aren’t satisfied before the closing or before the expiration of the purchase agreement.

Because it’s customary for the buyer to prepare the purchase agreement, the buyer’s first draft sets the tone of the negotiations.

The transaction can take two general forms:

  • Stock Purchase Agreement (SPA): This transfers the shares of the entity that owns the assets of the business. By purchasing the shares of the entity, the buyer owns the entity’s assets. Shares in an LLC are technically called “membership interests.” For the sake of simplicity, most parties refer to the transaction as a “stock sale.”
  • Asset Purchase Agreement (APA): This agreement transfers the individual assets from the seller to the buyer by signing a bill of sale. The seller retains ownership of the entity while the buyer forms a new entity to purchase the assets.

The buyer’s attorney normally begins drafting the purchase agreement once the due diligence process begins. Because it’s customary for the buyer to prepare the purchase agreement, the buyer’s first draft sets the tone of the negotiations. If the first draft is heavily weighted in the buyer’s favor, you can expect negotiations to be contentious and lengthy. On the other hand, a “fair” first draft is more likely to speed up the process and facilitate smoother negotiations.

The buyer’s first draft of the purchase agreement also functions as a disclosure tool. If the buyer is unsure regarding any aspects of the business, a representation covering that area will force you, as the seller, to disclose any exceptions to the representation. The purchase agreement can also be thought of as a tool for allocating risk between you and the buyer. 

Negotiating Positions

Here is a more detailed overview of the process of negotiating the purchase agreement:

  • Due Diligence: The extent of the negotiations is based on the facts discovered during due diligence. The purchase agreement should be prepared in tandem with the due diligence process so you and the buyer can negotiate the language as soon as possible in the transaction.
  • Buyer’s Attorney: Usually prepares the purchase agreement, which includes standard language focused on the likelihood and amount of potential exposure for the buyer. 
  • Seller’s Attorney: Lists any exceptions to the purchase agreement in the disclosure schedules.
  • Negotiations: Representations and warranties (reps and warranties) are one of the most hotly negotiated components of the purchase agreement, other than price and terms, especially when the seller wishes to retire and avoid lingering obligations. The scope of negotiations is based on the aggressiveness of the buyer’s attorney’s initial draft, and the bargaining positions and alternatives of each party. The current state of the market impacts not only the price of companies but also the terms of the transactions, such as the strength of the reps and warranties. Buyers aim for a long exclusivity period to reduce the seller’s bargaining power later in the process when the purchase agreement and reps and warranties are being negotiated. As the seller, your leverage evaporates once the LOI is signed.
  • Content: The purchase agreement contains more representations concerning the seller because the buyer has much more to lose than the seller does. 
  • Survival: Reps and warranties survive the closing and can have implications for both parties for years thereafter. The other elements of the purchase agreement, such as price and terms, conditions, and covenants, have no further implications after closing has taken place. 
  • Closing: For you, the seller, the “real closing” occurs when:
    • You have fulfilled your transition obligations.
    • Post-closing adjustments have been made, such as those involving working capital. 
    • You have received all the money due.
    • Earnout periods have expired.
    • You have satisfied the terms of employment and consulting agreements.
    • Indemnification period has elapsed.

The scope of the negotiations is different from transaction to transaction. For example, a stock sale may contain a different scope of provisions than an asset sale. Likewise, a buyer who is intimately familiar with an industry and is, therefore, more confident in their ability to conduct due diligence may demand a lesser scope than a buyer who isn’t familiar with the industry. No two negotiations are alike.

The scope of negotiations is dependent on the:

  • Negotiating skills, postures and bargaining strengths of each party.
  • Structure of the transaction – asset vs. stock sale.
  • Financial strength of the seller to indemnify the buyer:
    • If the shareholder group is dispersed, and the seller’s entity ceases to exist after the closing, the buyer will seek other protective deal measures, such as escrow.
  • Buyer’s knowledge of the business and industry:
    • If the seller’s management team is purchasing the company, they will be familiar with the business and may request less-stringent reps and warranties.
  • Nature of the business and its industry:
    • Businesses with more risks will be subject to more stringent reps and warranties.
  • Extent of issues discovered during due diligence.
  • Buyer’s ability to conduct thorough due diligence:
    • The more thorough due diligence is, the weaker the protective provisions can be, in theory.
  • Buyer’s assessment and perception of the seller’s character.
  • Buyer’s perception of the business’s risks.

As the seller, you can therefore minimize the potential scope of reps and warranties by:

  • Hiring an experienced negotiator, such as an investment banker or M&A advisor to manage negotiations.
  • Holding an auction to improve negotiating posture – the more buyers involved in negotiations, the stronger your position will be.
  • Conducting pre-sale due diligence to identify and address problems before beginning the sale process.
  • Presenting yourself in a trustworthy manner at all times:
    • Always be on time and do what you say you will do.
    • Maintain your composure during negotiations, make conservative estimates, etc.

If you operate a basic retail or service business, the reps and warranties likely won’t be broad in scope. But, if it’s a risky or complicated business, you can expect the buyer to demand much more stringent reps and warranties. For example, if your business handles hazardous materials, the buyer will request stringent representations addressing potential environmental concerns and possible workers’ compensation claims from workers handling hazardous materials. 

Purchase Agreement Outline

The structure of the purchase agreement will vary primarily depending on whether the form of the transaction is an asset or a stock sale. Most purchase agreements for lower middle-market transactions range in length from 20 to 50 pages, including the schedules and exhibits. 

Here are the key elements of a purchase agreement:

  • Key Terms:
    • Purchase Price: This defines the amount of the purchase price. It’s typically broken down by the earnest money deposit, down payment, additional deposit upon conclusion of due diligence, how the purchase price is to be paid (cash vs. stock), amount of seller financing, third-party financing, and the holdback amount. It also details whether an earnout is involved.
    • Inventory: This section contains a description of the inventory included in the sale as well as who will count the inventory – the buyer, the seller, or an inventory valuation service. It also provides adjustments to the purchase price based on differences in inventory between signing and closing, and a representation of the condition and salability of the inventory.
    • Allocation: The price for tax purposes.
    • Transaction Structure: Such as asset vs. stock sale.
  • Conditions and Covenants That Do Not Survive the Closing:
    • Conditions: Events that must occur before a closing can take place, such as financing or landlord approval. A common condition for closing is that the reps and warranties must be true as of the closing date – also called a “bring-down.”
    • Covenants: Responsibilities of the parties during the period between signing the purchase agreement and closing. These include the seller agreeing to operate the business as normal, the seller agreeing to retain a certain percentage of employees, or fulfilling outstanding purchases. These are rarely negotiated.
  • Protections Afforded To the Buyer That Do Survive the Closing:
    • Reps and Warranties: Promises and disclosures made by each party, such as assertions that the seller has paid all taxes due, or there is no outstanding litigation, which serve as “warranties” or “insurance” for each party in the event that a representation later proves to be untrue. Reps and warranties comprise the majority of the content in a purchase agreement and vary significantly based on the type of business. For example, manufacturing companies may have environmental and employee concerns while technology companies have intellectual property concerns. Reps and warranties are worded in the affirmative, and exceptions are listed in “Disclosure Schedules.” Examples of representations you might make as a seller include:
      • All assets are in good repair. 
      • All taxes will be paid at the closing. 
      • Seller has the legal capacity to sign the agreement. 
      • Seller has complied with all laws.
    • Reps and Warranties Can Be Limited by the Following:
      • Knowledge and Materiality Qualifiers: If you aren’t 100% sure regarding a representation, that representation should contain a knowledge qualifier such as “to the best of the Seller’s knowledge” or “to Seller’s knowledge.” 
      • Exclusions: Exclusions are documented in the disclosure schedules.
      • Survival Periods: The reps and warranties normally expire after 18 to 24 months. 
    • Indemnification: This section governs how disputes will be handled and outlines an obligation to cover costs of the other party for breaches of contract. This is usually covered by escrowing 10% to 15% of the purchase price. Indemnification is limited by baskets, or minimums, and caps, or maximums.
      • Minimum Basket: Minimum thresholds that must be triggered, which are similar to an insurance deductible. The average size is 0.75% of the purchase price. Baskets can be tipping or non-tipping, or the deductible can be shared between the buyer and seller.
      • Cap (Maximum): The maximum limit of indemnification. The average size is 10% to 20% of the purchase price.
      • Parties: The buyer seeks to obtain protection from as many parties as possible, such as shareholders and key managers. If multiple shareholders exist, they shouldn’t agree to “joint and several liability.” 
      • Scope: What is the scope of indemnification?
      • Remedies: Is indemnification the exclusive remedy?
      • Indemnification Process: How are indemnification claims handled?
    • Escrow Account – Not Normally a Separate Section in the Purchase Agreement:
      • Amount of Money: Usually ranges from 10% to 20% of the purchase price. Size is based on the likelihood and magnitude of potential risks.
      • Time Period: Usually ranges from 18 to 24 months. 
      • Conditions: Who controls its release, which is normally mutual, and how disputes are handled. 
      • Interest: Who should receive interest on the amount held in escrow?
  • Miscellaneous: This section can include clauses regarding expenses, notices, jurisdiction, governing law, severability, assignment, waivers, and other provisions that generally apply to all legal agreements.

The purchase agreement may also contain the following exhibits:

  • Assignment of Contracts: This document transfers third-party contracts from you to the buyer at the closing. This document may not be necessary for stock sales, as some agreements are transferable despite a significant change in the entity’s ownership.
  • Assignment of Intellectual Property: This exhibit transfers any intellectual property from you to the buyer, such as patents, trademarks, or other registered intellectual property. It can also transfer non-registered intellectual property, such as phone numbers, websites, and content.
  • Allocation of Purchase Price: This document breaks down the purchase price into separate asset classes for purposes of filing IRS Form 8504. 
  • Asset List: This is a detailed list of all tangible assets that are transferred. This list isn’t necessary for stock sales, although it doesn’t hurt to be clear on which assets are owned by the corporation or LLC and which assets are owned by you personally. Keeping an accurate list of assets can help prevent future litigation regarding which assets are included in the sale.
  • Assignment of Shares for a Stock Sale: This document transfers shares of the entity and is used for stock sales only.
  • Bill of Sale: The bill of sale transfers possession of the assets at the closing if the sale is structured as an asset sale. The bill of sale should list all tangible and intangible assets included in the sale. Some advisors list intangible assets separately and transfer them using a separate set of exhibits.
  • Buyer’s Disclosure Statement: This provides the buyer with the opportunity to make any necessary disclosures in writing.
  • Consulting Agreements: The independent contractor agreement is necessary if you, as the seller, will continue working for the buyer in some capacity, although it can also take the form of an employment agreement.
  • Corporate Resolution: A corporate resolution is required in an asset sale if the seller is an entity. Technically, the seller in an asset sale is the entity, such as a corporation or LLC, and a corporate resolution is required in the corporate bylaws when taking major actions such as selling all assets of the company. This resolution isn’t required if you are selling the entity, such as in a stock sale.
  • Deed of Sale of Entity: This document is required if you are selling the shares in the entity.
  • Disclosure Schedules: These are exceptions to the reps and warranties.
  • Holdback Agreement for Training: Holdbacks are common and require a third party to hold back a portion of the purchase price to reimburse the buyer for any covered items until the holdback period has expired.
  • List of Titled Property: A list of titled property includes such assets as real estate or vehicles. These assets require a separate set of transfer procedures.
  • Non-Compete Agreement: The non-competition agreement contains a description of what you may and may not do and specifies the length of time the agreement stands. Almost all M&A transactions include a non-compete agreement. Sometimes this agreement is included as a clause in the purchase agreement, and sometimes it’s listed separately as an exhibit. The non-compete agreement should be voided if the buyer defaults on payments to you.
  • Promissory Note: A promissory note is necessary if seller financing is involved. The promissory note is often personally guaranteed by the buyer for smaller transactions. The promissory note outlines the terms of repayment, and the security agreement is a document allowing you to place a lien on the assets of the business until the buyer pays in full. A UCC-1 financing statement also needs to be filed to perfect the lien.
  • Security Agreement: The security agreement enables the buyer to offer the assets of the business as security, or collateral, for the seller note until the seller is paid in full. This allows the seller to place a lien on the assets of the business and prevents the buyer from selling the business or further encumbering the assets of the business without your permission. 
  • Seller’s Disclosure Statement: This provides you with the opportunity to make any necessary disclosures in writing. This is a statement made by you, as the seller, regarding any adverse conditions of the business that the buyer should be aware of. Notifying the buyer in writing of any material adverse conditions of the business prevents potential litigation.
  • Share Pledge Agreement: If there is a seller note and a stock sale, there may be a share pledge agreement. For stock sales, shares of the entity can be held in trust or escrow until you are paid in full, which is similar to placing a lien on the assets of the company. It’s good practice to have a third party physically hold onto the shares until the note is paid in full.
  • Training Log: Logging the completion of the training period is a good practice to prevent potential future litigation.


Covenants are promises to do – or not to do – something and are seldom a contentious issue in purchase agreements. Covenants in a purchase agreement define the obligations of the parties between signing and closing, and sometimes also after the closing. 

Sample language: “Until closing, Seller will operate the business in the normal manner and will use its best efforts to maintain the goodwill of suppliers, customers, the landlord, and others having business relationships with Seller.”

As noted above, covenants can either be affirmative (a promise to do something) or negative (a promise not to do something). The most significant covenant requires the seller to operate the business as usual prior to closing. This requires the seller to not make any material changes to the business prior to closing without the buyer’s approval. Such changes could include purchasing new equipment, hiring new staff, or changing compensation arrangements with employees.

Pre-closing covenants are necessary only if the purchase agreement is signed prior to the closing. In this situation, the pre-closing covenants define how the business will be operated during the period of time between signing the purchase agreement and the closing. If signing and closing occur simultaneously, pre-closing covenants are usually unnecessary. However, the parties may include post-closing covenants, especially if you as the seller are carrying a note. Pre-closing covenants often require the parties to use their best efforts to obtain required consents or to cause the transaction to close, require the seller to provide information to the buyer during due diligence, or may preclude the seller from negotiating with other parties, which is an example of a negative covenant.

Post-closing covenants often require the buyer to offer employment to a certain number of the seller’s employees and provide certain benefits to those employees, or may require the seller to assist in collecting any outstanding accounts receivable. The only covenants that survive the closing are post-closing covenants.

Conditions don’t survive the closing. Reps and warranties, on the other hand, do survive the closing.


Conditions are requirements that must be met before the parties are obligated to close on the transaction, and are included in a purchase agreement if it’s signed before the closing. Conditions are also commonly called “contingencies.” Once the conditions are met, the closing can occur. The “conditions” section is also sometimes called “termination.” The conditions section typically lists a series of conditions that must be satisfied before the closing can occur.

Conditions don’t survive the closing. Reps and warranties, on the other hand, do survive the closing. This is an important distinction for the parties as the reps and warranties section of the purchase agreement continues to be an important element of the purchase agreement for a couple of years after the closing, or whatever the survival period is, which is typically 18 to 24 months. On the other hand, most other sections of the purchase agreement have no further implications once the closing has occurred. 

A breach of a condition relieves the parties from the obligation to close and is unlikely to provide you or the buyer with the option to initiate a lawsuit, whereas a breach of a representation or warranty provides the parties multiple remedies, as outlined in the indemnification section of the agreement. The sole remedy for a breach of a condition in most cases is simply the right to walk away from the transaction, also called a “termination right.” While termination fees are common in M&A transactions involving publicly traded firms, they are rare for privately held middle-market transactions. The rules and processes are significantly different for private and public firms. 

One important condition to closing is for the reps and warranties to be materially accurate. Thus, each representation functions as a condition to closing. 

While unknowns are common in M&A transactions, the parties must continue marching toward the finish line despite the existence of such gray areas. Successfully completing a middle-market M&A transaction requires a good deal of faith on both sides and not every potentiality can be neatly buttoned up in the agreements. In fact, the attempt to document every eventuality will only slow the transaction and lower the likelihood of a closing. Time kills deals. Either you waste time bickering over minutiae, or you speedily proceed toward the closing, balancing the need for clear documentation and good faith. An experienced advisor can provide guidance on when to proceed based on faith, and when faith is best put into writing. 

Most sellers prefer that buyers have a right to terminate the transaction only if material inaccuracies exist in the reps and warranties. Buyers prefer broader rights – even for immaterial inaccuracies in the reps and warranties, for example. The closing is also conditioned on the covenants. If the seller doesn’t operate the business in the ordinary course, the buyer may have a walk-away right. 

Here are sample conditions to the parties’ obligation to close:

  • Seller shall have performed all acts and covenants required in the purchase agreement.
  • All seller representations and warranties are true as of the closing date.
  • All seller approvals and consents required are delivered to the buyer.
  • All seller actions have been taken to convey the intellectual property to the buyer.
  • The assets of the business are free and clear.
  • The parties shall have obtained all necessary third-party consents.
  • The business has not suffered a “material adverse change” (MAC). This is a new invention since the 2008-2009 crash and is far beyond the scope of this book.

The documents specified in the purchase agreement must be delivered to the parties, such as the promissory note, non-competition agreement, etc.

Here’s the bottom line: let your attorney do what they do best while you focus on what you do best – running your business. Keep your hands on the steering wheel while your attorney tinkers with the technicalities. 

Time kills deals.

Parties to the Purchase Agreement

Whoever signs the agreement is a party to the agreement. If you sign the agreement in the capacity of an officer of the corporation, then in most cases, you can’t be held personally liable for breaches of the agreement. 

The selling entity ceases to exist in most cases after the closing. That’s why most buyers either require that the majority shareholders of the selling entity sign the purchase agreement as individuals, and not as officers of the corporation, or that a portion of the purchase price be set aside in an escrow account to fund indemnification obligations. Alternatively, the shareholders can sign a joinder agreement, which binds them to the purchase agreement. 

What if something happens between signing and closing?

The simple, or affordable answer is, “Refer to the purchase agreement.” The complicated, or expensive answer, and the one most favored by attorneys is, “It depends.” 

If the purchase agreement has been signed, and most aren’t signed before the closing, the purchase agreement will govern the buyer’s obligation to close, particularly the “conditions precedent to closing.” Most purchase agreements include a “material adverse change” clause, also called a MAC clause for short, which outlines the conditions under which the buyer may terminate the agreement. The purpose of a MAC clause is to shift risk to the seller for significant downturns or other calamitous events that may impact the business between signing and closing. In a nutshell, the buyer will not be obligated to close if any covenants have been breached, the conditions for closing have not been met, or the reps and warranties are untrue as of the closing.

You should inform the buyer as soon as possible if an event has occurred that makes a representation untrue. Examples include the loss of a major customer or the filing of a lawsuit. Some purchase agreements obligate the buyer to immediately notify the seller if they discover a breach and require the buyer to either terminate the agreement or waive the breach and proceed with the closing. Without such an obligation, the buyer could withhold this information and unload it on you at the last minute as a negotiating tactic. 

The following is such an example:

The Seller shall promptly notify the Buyer in writing of any change in facts and circumstances that could render any of the representations and warranties made herein by the Seller materially inaccurate or misleading.

Another example of sample termination language:

This Agreement may be terminated at any time prior to the Closing: by the Seller, if the Buyer (i) fails to perform in any material respect any of its agreements contained herein required to be performed by it on or prior to the Closing Date, (ii) materially breaches any of its representations, warranties, or covenants contained herein, which failure or breach is not cured within 30 days after the Seller has notified the Buyer of its intent to terminate this agreement.