Anatomy of a Purchase Agreement: SPA and APA Sections

A purchase agreement is the document that turns a signed letter of intent into a binding transfer of a business. For privately held companies it is usually the longest and most heavily negotiated contract an owner ever signs, and its structure follows a predictable pattern whether the deal is drafted as a stock purchase agreement (SPA) or an asset purchase agreement (APA). Reading it with context, section by section, makes the logic clearer: most of the document exists to allocate risk between a buyer and seller who each know different things about the company. The overview below is general education, not legal, tax, or investment advice, and specific deals turn on their own facts and counsel.

Two structures, one architecture

The threshold choice is how the business changes hands. In a stock purchase, the buyer acquires the outstanding equity, and the company carries over with all of its assets, rights, and liabilities, including unknown or undisclosed ones. In an asset purchase, the buyer acquires only the specific assets it identifies and assumes only the liabilities it agrees to take, leaving the rest with the seller. The two structures carry different tax consequences. Asset deals generally give the buyer a stepped-up basis in the acquired assets, while sellers often favor stock deals because they can produce single-level taxation rather than potential tax at both the entity and shareholder levels. Buyers frequently prefer asset deals for the control over liabilities. Despite these differences, both documents share the same skeleton: parties and price, representations and warranties, covenants, closing conditions, indemnification, and termination.

Purchase price and adjustment mechanics

The headline number in a purchase agreement is rarely the amount that actually moves at closing. Most private-company deals are structured on a cash-free, debt-free basis, meaning the price assumes the seller keeps its cash and pays off its debt, so the mechanics adjust for what is actually there on the closing date. Common adjustment tools include:

• Working capital adjustment. The parties agree on a target level of net working capital. An estimate is prepared shortly before closing, and a final calculation is completed roughly 30 to 90 days afterward. If closing working capital falls short of the target, the price is reduced; if it exceeds the target, the price rises. A target of 500,000 against an actual figure of 450,000, for example, would reduce the price by 50,000.
• Escrow or holdback. A portion of the proceeds, often in the range of 5 to 15 percent of the price, is held by a third party to fund post-closing claims and adjustments before it is released to the seller.
• Earn-outs. Contingent payments tied to future performance, such as an additional sum if the company hits an agreed EBITDA or revenue threshold within a defined period.

Representations and warranties

Representations and warranties are statements of fact that each side makes about itself and, for the seller, about the company. They are the informational backbone of the agreement. Typical seller representations address organization and authority to sign, capitalization or clear title to the assets, the accuracy of financial statements, taxes, material contracts, litigation, compliance with laws, employees and benefits, intellectual property, and environmental matters, closing with a catch-all confirming no material omissions. These statements are frequently qualified by materiality and knowledge qualifiers, which limit a representation to facts above a certain threshold or within the seller's awareness. Their purpose is threefold: to surface information, to allocate risk, and to serve as the basis for a later indemnity claim if a statement proves false. A subset known as fundamental representations, which usually covers organization, authority, ownership, and sometimes taxes, is treated more protectively than general business representations.

Disclosure schedules

Representations rarely stand alone. They are read against a companion document, the disclosure schedules, that lists exceptions to what the representations otherwise state. If a representation says there is no pending litigation, the litigation schedule sets out any matters that in fact exist. This is where much of the real diligence work becomes visible, and where accuracy matters most: an item properly disclosed on a schedule is generally not a breach of the corresponding representation, so complete schedules tend to narrow a seller's later exposure rather than widen it. Preparing them is often the most labor-intensive part of drafting from the seller's side, and gaps or errors discovered late can slow the process or shift leverage in negotiation. Buyers review the schedules alongside their diligence findings, testing whether what the data room showed matches what the representations promise.

Covenants

Covenants are promises to do or refrain from doing specific things. When signing and closing happen on different dates, interim operating covenants govern the gap, typically requiring the seller to run the business in the ordinary course and to avoid actions such as paying unusual dividends, taking on new debt, or signing major contracts without the buyer's consent. Other covenants commit the parties to use efforts to obtain third-party consents and any required regulatory approvals, to keep the transaction confidential, and to deal exclusively with each other during the negotiation period. Restrictive covenants, such as non-competition and non-solicitation undertakings by the seller, are also commonly captured here and can survive the closing for a defined term.

Closing conditions

Closing conditions, sometimes called conditions precedent, are the boxes that must be checked before either party is obligated to complete the deal. Standard conditions include a bring-down requirement that the representations remain true at closing, confirmation that the covenants have been performed, the absence of a material adverse effect on the business, receipt of required consents and regulatory clearances, and the absence of any court order blocking the transaction. If a condition in a party's favor is not satisfied and is not waived, that party can decline to close without breaching the agreement. When signing and closing happen at the same moment, the conditions section shrinks and much of the interim covenant machinery falls away, because there is no gap between the two dates left to police. In deals with a delay for regulatory clearance or third-party consents, by contrast, the conditions become one of the most closely negotiated parts of the document.

Indemnification: baskets, caps, and survival

Indemnification is the post-closing remedy that lets one party recover losses caused by the other's breach of a representation, warranty, or covenant. Several negotiated limits shape how much recovery is possible:

• Basket. A threshold of losses that must accumulate before any claim is payable. In a deductible basket, which market data shows is the more common structure, the seller pays only the amount above the threshold. In a tipping basket, once the threshold is crossed the seller pays from the first dollar. Baskets are frequently set at around one percent of transaction value or less.
• Cap. The maximum aggregate amount the seller can be required to pay. Studies of private deals have found that most caps sit below the purchase price, with a large share falling in the 1 to 10 percent range, often aligned with the escrow amount.
• Survival. How long representations remain enforceable after closing. General business representations commonly survive 12 to 24 months, while fundamental and tax representations survive longer, sometimes tied to the applicable statute of limitations.

Certain matters are typically carved out of these limits, including fraud and breaches of fundamental representations, which are often recoverable up to the full purchase price. Representation and warranty insurance, increasingly common in the middle market, can shift much of this risk to an insurer and is associated with lower baskets and caps in the underlying agreement.

Termination and the value of preparation

The termination section governs how the parties can walk away before the deal closes. Common triggers include mutual written consent, the passing of an outside or drop-dead date without a closing, an uncured material breach, or the failure of a closing condition, and some agreements attach a break-up fee to particular exit paths. Because so much of the document, from the schedules to the indemnity limits, turns on the quality of the underlying information, sellers who enter a process with clean financials, organized diligence, and accurate schedules tend to face less friction in negotiation and less exposure afterward. Platforms that assemble diligence-ready materials and a virtual data room in advance, of which Bankerly is one example, aim to reduce that friction by making the record complete before the drafting begins. None of this substitutes for review by qualified legal and tax advisors, who tailor each provision to the specific transaction.

Sources

• DeWitt LLP: An Overview of an Asset Purchase vs. Stock Purchase
• JM Tax Law: Representations and Warranties in Stock and Asset Purchase Agreements
• DarrowEverett: Purchase Price Adjustments in M&A Transactions
• Morse: Indemnification Caps and Baskets in M&A Transactions
• Schwabe: Getting the Purchase Price Right: Earn-Outs, Escrows, and Post-Closing Adjustments