Sale and Purchase Agreement
Definition
The sale and purchase agreement (SPA) is the definitive contract that transfers ownership of a business from seller to buyer. It sets out the price and how it is paid, the completion mechanism, and the warranties and indemnities the seller gives about the state of the business. In a share sale the SPA transfers the shares in the company; in an asset sale it transfers specified assets and liabilities. Schedules to the SPA typically deal with completion accounts or a locked-box price, any earn-out, restrictive covenants on the seller, and the disclosure against the warranties. In the UK an SPA is usually accompanied by a disclosure letter, which qualifies the warranties, and a tax deed. Negotiating the SPA is where much of the real value and risk of a transaction is allocated, long after the headline price has been agreed in heads of terms.
Complementary Terms
Concepts that frequently appear alongside Sale and Purchase Agreement in practice.
Heads of terms (also called a letter of intent or memorandum of understanding) is the short document that records the main commercial terms a buyer and seller have agreed in principle before formal contracts are drafted. It typically covers the headline price, the deal structure (a share sale or an asset sale), any earn-out, the conditions to completion, and an exclusivity period during which the seller agrees not to talk to other buyers.
Warranties and indemnities are the contractual protections a buyer receives from a seller in a business sale. Warranties are statements of fact about the business — that the accounts are accurate, that it owns its assets, that there are no undisclosed disputes — and if a warranty proves untrue the buyer may claim damages for the resulting loss.
A disclosure letter is the document a seller delivers alongside the sale and purchase agreement to qualify the warranties they are giving. Warranties are statements that the business is in a particular condition; the disclosure letter sets out the exceptions — the facts that make a warranty untrue or partly untrue — so that the buyer takes the business knowing about them and cannot later claim for what was disclosed.
A mechanism used in M&A transactions where the final purchase price is adjusted after closing based on the target company's actual financial position — typically net assets, working capital, debt, and cash — as at the completion date. Completion accounts are prepared post-closing and compared against agreed targets, with adjustments settling the difference between estimated and actual values.
Further Reading
How to Sell Your Business: The Owner's Guide
The full sell-side hub: what buyers value, how to prepare, and how to evidence it.
Read more →Related FAQ
What is the difference between a share sale and an asset sale?
In a share sale the buyer acquires the company itself, including its liabilities; in an asset sale the buyer acquires specified assets and leaves most liabilities behind. The choice has major tax and risk consequences.
Read full answer →Heads of terms is the short document recording the main commercial terms a buyer and seller have agreed in principle — price, structure, earn-out, conditions and exclusivity — before formal contracts are drafted. It is mostly non-binding.
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