Share purchase agreement explained: what goes into an SPA and how the price is structured

A share purchase agreement can be anywhere between five and 200 pages long. What goes into it, and how do you know what you are signing? The length varies so much because the SPA has to cover whatever the particular deal needs, but the structure is remarkably consistent from one deal to the next. In short, the SPA records the deal between the buyer and the seller of a UK limited company. The parts that matter most are the purchase price and how it is adjusted, the restrictive covenants that bind the sellers after the sale, and the warranties and tax covenant that the sellers give to the buyer. Here is how the document fits together, how the price is usually structured, and one practical tip each for buyers and sellers.

SPA vs asset purchase agreement (APA)

The purpose of the share purchase agreement is to set out the agreement between the buyer and the seller of a UK limited company. The difference between an SPA and an asset purchase agreement is what you are buying:

• Share purchase agreement: you buy the entire limited company by acquiring its shares, so the ownership of the company passes to you with everything inside it.
• Asset purchase agreement: you buy specific assets out of a trading company, and the company itself stays with its owners.

Everything that follows is about the share purchase, where the whole company changes hands. That is also why the SPA tends to be the longer and more detailed of the two documents: when you buy the shares, you take on the company's history, its contracts and its liabilities, known and unknown, so the agreement has to deal with all of them.

Key clauses in a share purchase agreement

In my opinion there are three parts of an SPA that matter more than everything else.

The purchase price

The purchase price is rarely completely fixed when a company is acquired. Instead it is typically adjusted in one of three main ways, which are covered below. The SPA usually has a clause in the main body of the contract that states the purchase price and says how it is adjusted, up or down. Then there is a schedule, an extension to the SPA, that goes into more depth on how to calculate the adjustment: how the parties arrive at the amount by which the price increases or decreases. When you read an SPA for the first time, it is worth reading the price clause and its schedule together, because the clause tells you the headline figure and the schedule tells you what you will actually pay.

Restrictive covenants for sellers

The second main provision is the restrictive covenants. These govern what the sellers can and cannot do after they have sold the business. Typically the sellers are restricted from three things:

• Competing with the business they have just sold.
• Poaching its clients.
• Poaching its suppliers.

Without these, nothing stops a seller taking the price and then setting up next door with the same customers. The sellers know the clients and suppliers personally, which is exactly why the buyer needs the covenants in writing.

Warranties and the tax covenant

The third main part is the warranties and the tax covenant that the sellers give to the buyer. These typically sit in two separate schedules to the SPA.

Warranties are promises the sellers make to the buyer about the state of the business. A very simple example is a warranty that the company does not owe any money to HMRC. If a warranty turns out to be untrue, the buyer has a claim against the sellers.

The tax covenant works differently. In effect, the sellers agree to indemnify the buyer and the company for tax liabilities, including ones that were unknown at the time of the sale. If a tax bill relating to the period before completion surfaces later, the tax covenant is what lets the buyer recover it from the sellers.

Between them, the warranties and the tax covenant are how the SPA allocates risk. The buyer is responsible for its own due diligence, but no investigation finds everything. The warranties and tax covenant are the buyer's protection for what was missed, and the length of those schedules usually reflects how much protection the buyer has negotiated.

How to structure the purchase price

Usually only a percentage of the purchase price is actually paid on completion. The rest is deferred over a period of time, say two to three years. Purchase price adjustments are then usually made by increasing or decreasing those deferred payments, in other words by changing how much the buyer still owes the seller.

Keep in mind that the adjustments are usually calculated after completion has already happened. After completion, the accountants for the buyer and the seller typically get together and work out how the price should move. This is why deferring part of the price is so useful from the buyer's point of view: the adjustment can simply be applied to money that has not yet been paid.

There are three main ways to structure the price, and the choice between them is one of the most important commercial decisions in the deal:

• Locked box. The price is locked as at an agreed date, and the parties agree what value can and cannot leave the business between then and completion. Anything that leaves without permission reduces the deferred payments.
• Cash-free, debt-free. The seller hands over the business with no liabilities and no excess cash. Liabilities left in the business reduce the price pound for pound, and excess cash increases it.
• Net asset value. The parties agree a target net asset value as at completion. Completion accounts are then prepared, and the difference between the target and the actual figure is added to or deducted from the price.

I cover each of these in depth, with a worked example, in locked box vs completion accounts. For the purposes of understanding the SPA, the point is that the price clause and its schedule exist to implement whichever of these three mechanisms the parties have chosen, and that the adjustment normally flows through the deferred payments rather than through cash changing hands again.

SPA tip for buyers

Buying or selling a business typically takes at least three months, a lot of time and a lot of energy. My tip to the buyer is to meet with the seller regularly, ideally weekly, even if only by video call, and keep building rapport and trust.

It is very likely that at some point the solicitors on the deal will not be able to agree on certain provisions or wording of the SPA. That is when the trust you have built with the seller comes in handy. When the lawyers are stuck, the buyer and the seller should get together, discuss the point and iron it out between themselves. In my experience, a point that has gone back and forth between solicitors for a week is often settled in a ten-minute conversation between the principals, because they can trade on the commercial relationship rather than the drafting.

SPA tip for sellers

My tip for the seller is to get support. As a seller, you are probably still running the business while trying to get the deal across the line, and that takes a lot of energy and brings a lot of stress.

Bring someone in to help. That might be someone inside the company who can take on some of your day-to-day duties, or someone like a spouse who can help you deal with the due diligence requests the buyer will send during the acquisition. The volume of those requests surprises most sellers, and having a second pair of hands keeps the deal moving.

Reading an SPA for the first time

If you are handed a long SPA, do not try to read it front to back. Go to the price clause and its schedule, then the restrictive covenants, then the warranty and tax covenant schedules. Those are the parts that decide what you pay, what the sellers can do afterwards and what protection you have. The rest of the document is largely mechanics.

Next steps

If you are about to sign an SPA, make sure you understand which of the three price mechanisms it uses, what the restrictive covenants stop the sellers doing, and how long the warranty and tax covenant schedules are. Those three areas are where most of the risk sits. A corporate solicitor should take you through them before you commit.