SPA agreements – key components and strategies in M&A
Are you planning to buy or sell a business? If so, there’s one document that can make or break the deal; the Sale and Purchase Agreement (SPA). This is the legal contract that defines exactly what’s being bought, for how much, and under what conditions.
Get it right, and you have a smooth transaction. Get it wrong, and you could face unexpected risks, financial surprises, or even legal battles.
What is an SPA in business?
The term SPA stands for Sale and Purchase Agreement. It’s a legally binding document that details the transfer of shares or assets from one party to another.
Think of it as the final blueprint of the deal. It covers what’s being sold, the price, the conditions, and the legal protections for both sides. Without it, there’s no formal transaction.
This document is essential in SPA M&A transactions, and it typically covers the following:
- Purchase price and payment structure – The agreed amount and how it will be paid.
- Transaction conditions – Requirements that must be met before the deal closes.
- Warranties and indemnities – Legal protections to safeguard both sides.
- Post-completion obligations – Actions required after the deal is finalised.
Key components of an SPA agreement
1. Purchase price and payment terms
The purchase price is the foundation of any SPA. It defines not just the amount but also how and when it will be paid. Some deals involve a fixed price, while others include adjustments based on financial metrics at closing.
Payment structures vary and may include:
- Lump sum payments – A single full payment upon deal completion.
- Deferred payments – Installments spread over time.
- Earnouts – Additional payments based on future performance.
Each method has implications for both buyers and sellers, so negotiating favorable terms is critical.
2. Representations, warranties and indemnities
Both sides need assurances. The seller wants to be free of liability after the sale, while the buyer wants guarantees that they’re getting what they paid for.
Warranties are statements about the business’s condition (e.g., “Our financial records are accurate”).
Indemnities protect against unexpected liabilities (e.g., “If there’s an undisclosed tax issue, the seller will cover it”).
These sections can lead to intense negotiations, as they define who takes on what risk. Sellers usually want to limit their liability, while buyers want broad protections.
3. Conditions precedent and closing conditions
Most SPA agreements include pre-closing conditions, i.e. things that must be completed before the transaction can be finalised.
Common requirements include regulatory approvals, third-party consents (e.g., from lenders or suppliers), and the completion of due diligence.
If these conditions aren’t satisfied, the deal may be delayed or even canceled.
4. Restrictive covenants
To protect business value, buyers often include clauses restricting the seller’s activities after the deal. These may include:
Non-compete clauses – Preventing sellers from launching a competing business.
Non-solicitation clauses – Stopping sellers from hiring former employees or taking clients.
These protections ensure the buyer isn’t immediately undercut by the seller post-transaction.
5. Governing law and dispute resolution
Every SPA agreement specifies which legal system governs the contract and how disputes will be resolved. Many agreements favor arbitration over court litigation, as it is often faster and more confidential.
Best strategies for structuring an SPA agreement
Thorough due diligence
Before signing, conducting comprehensive due diligence is essential. This process uncovers any potential risks, such as hidden debts, legal disputes, or tax liabilities. Identifying issues early prevents costly surprises later.
Price adjustment mechanisms
To avoid conflicts, SPA agreements often include mechanisms to adjust the purchase price based on financial metrics at closing. Two common methods are:
Completion accounts – The final price is based on the company’s financial position at the time of completion.
Locked-box mechanism – The price is fixed based on an earlier balance sheet date, preventing manipulation of financials before closing.
Clear indemnity and warranty provisions
Sellers should negotiate caps on liability, while buyers should push for strong protections against hidden risks. The right balance depends on the bargaining power of each party.
Common mistakes to avoid in SPA M&A deals
Even well-structured agreements can fail due to common pitfalls, such as:
- Vague language – If terms aren’t crystal clear, expect disputes. Always be specific.
- Weak post-closing obligations – If handover terms aren’t spelled out, things can get messy fast.
- Overlooking regulatory approvals – Some deals fall apart because required licenses or permissions weren’t secured.
- Ignoring tax implications – A sale structured poorly can lead to unexpected tax bills. Always factor this in.
For expert guidance, consulting professionals like Acquinox Advisors SPA M&A can help navigate these complexities.
FAQs about SPA agreements in M&A
What does SPA mean in business?
SPA stands for Sale and Purchase Agreement, a legal contract that governs the terms of a business sale.
Why is an SPA important in M&A?
It defines the deal’s terms, protects both parties, and ensures a legally binding agreement.
What’s the difference between an SPA and an SHA?
An SPA governs the sale of shares or assets, while a Shareholders’ Agreement (SHA) regulates the rights of shareholders post-transaction.
How can buyers protect themselves in an SPA agreement?
By including strong warranties, indemnities, and price adjustment mechanisms to cover potential risks.
Where can I get expert help on SPA M&A transactions?
Firms like Acquinox Advisors specialise in structuring M&A agreements to ensure a smooth transaction.
Mastering SPA agreements for successful M&A deals
A poorly drafted SPA agreement can create massive problems down the road. But a well-structured one? It ensures both parties walk away satisfied, knowing they’re protected!