Business sale and purchase agreement: what to include and what to watch out for

Sale and purchase agreements are long and complex documents. If you are buying a business, understanding the main things the agreement must do for you, and the handful of traps it can contain, will save you from costly mistakes. This guide covers what an SPA is, what to include as a buyer, and what to look out for when you read one.

What is a sale and purchase agreement?

Simply put, a sale and purchase agreement, or SPA, is a contract that details the sale of a business from a seller to a buyer. It records what is being sold, for how much, on what terms, and what each side promises to the other.

Share purchase vs asset purchase agreement

The SPA comes in two main forms. A share purchase agreement is used when you are buying the shares of the company, and so the company itself. An asset purchase agreement is used when you are buying particular assets from the company rather than the company. Which one you need depends on the structure of your deal, and I explain the differences in share sale vs asset sale.

What to include in an SPA

As a buyer, there are three things I would make sure the agreement covers.

Identify the real seller

First, you need to understand who the real seller is. Is it the person holding the shares in the company, who is selling you those shares? Or is it the company itself, selling you its assets? The answer determines who the contracting party is, who gives the warranties, and who you have a claim against if something goes wrong. Get this wrong and the agreement may not bind the person you think it does.

SPA warranties: what to include

Second, as a buyer you will want to include extensive warranties that protect your interests. Warranties are like promises made by the seller to the buyer about the state of the business.

My advice as a solicitor is this: every time the seller makes a representation to you about the state of the business, include it in the SPA as a warranty. If the seller tells you the accounts are accurate, that there are no disputes, that the key customers are under contract, write it in. This helps to show that you relied on the statements the seller made when deciding whether to buy the business, and it gives you something to enforce if they turn out to be untrue. For how warranties work in practice, see what is a warranty in a business sale.

Post-completion obligations

Third, include the post-completion obligations of the seller. Just because you have bought the business does not mean you can immediately run it as if you had owned it for years. You will need the seller to cooperate with you after completion and grant you access to, for example, important accounts and systems. The SPA should spell out what the seller has to do and for how long, so that the handover does not depend on their goodwill.

What to be aware of in an SPA

Now the other side of the document: the things that can work against you.

Disclosed matters: a trap for buyers

Look out for the word "disclosed". If anything is deemed to have been disclosed to the buyer, the buyer is treated as having known about those specific issues. That means that as the buyer you will find it very hard to seek recourse against the seller for issues that have apparently been disclosed to you, because you cannot say you relied on a warranty you knew was untrue. So read carefully what is treated as disclosed, and how widely that word is drawn.

Indemnities in a sale and purchase agreement

Second, look out for any indemnities. Sometimes sellers include indemnities that protect themselves after the business has been sold. An indemnity is a contractual obligation, in this case on the buyer, to cover costs or damages that the seller might otherwise have to pay. An indemnity running the wrong way can quietly shift risk back onto you, so check who is indemnifying whom and for what.

What is a disclosure letter?

The SPA is part of a larger process. Before the acquisition is completed, at exchange and completion, make sure you request a disclosure letter from the seller. The disclosure letter is where the seller sets out the matters that qualify the warranties, so it is the document that tells you exactly what is being treated as disclosed. You need to read it alongside the SPA, not after you have signed.

Companies Act formalities on a share sale

Third, if you are doing a share sale, make sure you comply with the Companies Act. That entails drafting board minutes and general resolutions, and registering the transfer both at Companies House and in the company's internal registers. This is a critical aspect that is often overlooked, and it determines whether the share sale is valid or not. An SPA on its own does not transfer the shares; the formalities do.

Next steps

Before you sign, check that the SPA names the right seller, turns the seller's statements into warranties and sets out the post-completion cooperation you need. Then read the disclosure letter and every indemnity with the same care, and have your corporate solicitor deal with the board minutes, resolutions and registrations on completion. For a more detailed walk through the document, see share purchase agreement explained.