The Purchase Agreement: Your Deal's Final Blueprint
The definitive purchase agreement is the legally binding document that governs your entire transaction. Every clause matters — from representations and warranties to indemnification caps and survival periods.
Definition
The purchase agreement (also called the definitive agreement or acquisition agreement) is the comprehensive, legally binding contract that finalizes an M&A transaction. It supersedes the LOI and contains all deal terms including purchase price, representations and warranties, indemnification provisions, closing conditions, and post-closing obligations.
Representations and Warranties
Reps and warranties are statements of fact made by both buyer and seller about the business, its operations, and legal status. Seller representations typically cover: accuracy of financial statements, title to assets, compliance with laws, status of contracts, employee matters, tax compliance, and absence of undisclosed liabilities. These representations survive closing and form the basis for indemnification claims.
Indemnification
The indemnification section defines each party's obligation to compensate the other for losses arising from breaches of representations, warranties, or covenants. Key negotiation points include: indemnification caps (typically 10-20% of purchase price for general reps), deductible baskets (the threshold before claims are payable), survival periods (how long reps remain enforceable — typically 12-24 months), and escrow holdbacks to fund potential claims.
Closing Conditions
Conditions precedent to closing include: satisfactory completion of due diligence, obtaining required third-party consents, regulatory approvals, absence of material adverse changes, execution of ancillary agreements (employment, non-compete, transition services), and accuracy of representations at closing. Either party can walk away if conditions aren't met.
Post-Closing Obligations
Common post-closing obligations include: seller transition assistance (typically 3-12 months), non-compete and non-solicitation covenants, working capital true-up procedures, earnout administration, and tax cooperation. Understanding these obligations before signing prevents surprises after you've closed.
Common Questions
Frequently Asked Questions
How long does it take to negotiate a purchase agreement?
Purchase agreement negotiations typically take 4-8 weeks in lower middle market transactions. Complex deals or those with significant regulatory requirements may take longer. Having experienced M&A counsel is essential to protect your interests without creating unnecessary delays.
What is an indemnification escrow?
An escrow holdback is a portion of the purchase price (typically 5-15%) held by a third-party escrow agent for 12-24 months post-closing. It serves as a fund to cover potential indemnification claims. Unclaimed escrow funds are released to the seller after the survival period expires.
Can I negotiate the non-compete terms?
Yes. Non-compete duration (typically 3-5 years), geographic scope, and industry restrictions are all negotiable. Overly broad non-competes can limit future opportunities, so push for reasonable, narrowly defined restrictions that protect the buyer's legitimate interests without unnecessarily restricting your career.
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