Understanding the Purchase Agreement: APA vs. SPA

The purchase agreement is the definitive legal document that transfers ownership of a business. There are two primary forms: Asset Purchase Agreement (APA) and Share Purchase Agreement (SPA). This guide covers the key clauses, negotiation points, and practical considerations for each. For the tax and structural comparison, see our asset vs. stock purchase guide.

Asset Purchase Agreement (APA)

In an APA, you buy specific assets and assume specific liabilities. The legal entity remains with the seller.

What you’re buying

• Tangible assets: Equipment, inventory, vehicles, furniture, fixtures
• Intangible assets: Customer lists, goodwill, trade names, intellectual property, contracts
• Assumed liabilities: Specifically enumerated liabilities you agree to take on (e.g., accounts payable, lease obligations)
• Excluded assets: Cash, receivables (typically), and personal assets of the seller
• Excluded liabilities: Everything not explicitly assumed stays with the seller’s entity

Key APA clauses

• Schedule of assets: Detailed list of every asset being purchased, often as exhibits
• Schedule of assumed liabilities: Explicitly enumerate each liability you’re taking on
• Bulk sale compliance: Some states require notice to the seller’s creditors before an asset sale
• Assignment of contracts: Customer and vendor contracts must be individually assigned. Some require counterparty consent
• Employee matters: You’re not acquiring the seller’s employees, you’re hiring them as new employees of your entity. Handle benefits, PTO accruals, and employment terms carefully
• Allocation of purchase price: How the total price is allocated across asset classes (equipment, goodwill, non-compete, etc.) affects tax treatment for both parties

When to use an APA

• You want to cherry-pick assets and leave liabilities behind
• The seller’s entity has unknown or contingent liabilities
• You want a step-up in tax basis on acquired assets ( tax benefits)
• The business has pending or historical legal issues
• The target is a sole proprietorship or single-member LLC

Share Purchase Agreement (SPA)

In an SPA, you buy the ownership interests (shares/membership units) of the legal entity. The entity continues to exist with all its assets, liabilities, contracts, and employees intact.

What you’re buying

• The entity itself: All assets, all liabilities (known and unknown), all contracts, all employees
• Complete continuity: Contracts, licenses, permits, and employer relationships remain in place
• Historical liabilities: You inherit the entity’s full legal, tax, and regulatory history

Key SPA clauses

• Representations and warranties: More extensive than in an APA because you’re buying the entire entity. The seller represents the company’s condition across 20-40 categories
• Disclosure schedules: Detailed exceptions to representations (known liabilities, pending litigation, contract defaults)
• Indemnification: Seller agrees to compensate buyer for losses from breaches of reps/warranties, typically with caps, baskets, and time limits
• R&W insurance: For larger deals ($10M+), Representations & Warranties insurance can supplement or replace seller indemnification
• Escrow/holdback: 10-15% of purchase price held in escrow for 12-24 months to cover indemnification claims

When to use an SPA

• The business has non-assignable contracts, licenses, or permits (government contracts, professional licenses)
• Contract assignment would trigger change-of-control provisions with customers or vendors
• The entity holds real estate or other assets that are expensive to transfer
• The seller strongly prefers stock treatment for capital gains tax reasons
• The target is a C-Corporation (seller avoids double taxation)
• You are using SBA financing and the lender requires entity continuity

Common clauses in both APA and SPA

Purchase price and adjustments

• Base purchase price: Fixed amount or formula (e.g., X times trailing EBITDA)
• Working capital adjustment: Mechanism to adjust price based on actual working capital at closing vs. a target “peg”
• Earn-out: Contingent consideration tied to post-closing performance
• Seller note: Deferred portion of purchase price paid over time

Representations and warranties

The seller certifies the condition of the business. Key categories:

• Organization and authority to sell
• Financial statements accuracy
• No undisclosed liabilities
• Tax compliance
• Material contracts and their status
• Litigation and disputes
• Environmental compliance
• Employee and labor matters
• Intellectual property ownership
• Insurance coverage

Conditions to closing

• Satisfactory completion of due diligence
• Financing in place
• Required consents obtained (landlord, key customers, regulators)
• No material adverse change (MAC) between LOI and closing
• Non-compete agreement executed by the seller
• Transition services agreement in place

Post-closing provisions

• Indemnification: Seller covers losses from breaches of reps/warranties and undisclosed liabilities
• Escrow: Purchase price holdback to secure indemnification obligations
• Non-compete: Seller agrees not to compete for 3-5 years within a defined geography
• Transition assistance: Seller provides consulting services for 6-12 months post-closing

Negotiation tips for buyers

• Hire experienced M&A counsel: The purchase agreement is not the place to save money. Budget $30K-$75K in legal fees for the buy-side
• Don’t negotiate every clause: Focus on material provisions (price, reps/warranties, indemnification) rather than fighting over boilerplate
• Working capital peg is critical: Get this right. Disagreements over working capital adjustments are the #1 source of post-closing disputes
• Escrow protects you: Push for 15-20% escrow for 18-24 months, especially in share purchases where you inherit unknown liabilities
• Read disclosure schedules carefully: The exceptions to reps/warranties are where the risks hide

The purchase agreement is the culmination of your negotiation process. For legal risks to investigate before signing, see our legal due diligence guide.

Frequently Asked Questions

Which is more common in search fund acquisitions, APA or SPA?

Asset Purchase Agreements are more common in search fund deals, particularly for smaller acquisitions under $10M. APAs allow buyers to select specific assets and leave behind unknown liabilities, which is especially important for first-time operators who want a clean start. However, SPAs are used when non-assignable contracts or licenses make an asset purchase impractical.

How long does it take to negotiate a purchase agreement?

Typically 4 to 8 weeks from first draft to execution. The initial draft takes 1 to 2 weeks, followed by 2 to 4 rounds of markup between buyer and seller counsel. The most time-consuming negotiations involve representations and warranties, indemnification caps and baskets, and the working capital adjustment mechanism. Starting with a well-drafted letter of intent that addresses key business terms accelerates the process.

What is a working capital adjustment and why does it matter?

A working capital adjustment ensures the business has sufficient operating capital at closing. The buyer and seller agree on a target working capital “peg” (typically the trailing 12-month average of current assets minus current liabilities). If actual working capital at closing exceeds the peg, the buyer pays the surplus to the seller; if it falls short, the purchase price is reduced. This is the number one source of post-closing disputes, so defining what is included in the calculation is critical.