Quick answer: A business purchase agreement is the binding contract that replaces the letter of intent. Its key terms are the price and adjustments, the seller’s representations and warranties with the disclosure schedules, covenants, conditions to closing, indemnification with its limits and escrow, and termination rights. Much of a seller’s risk sits outside the price line, in definitions, flat representations, broad indemnities and loose conditions, so each should be read against the letter of intent and reviewed with counsel before signing.
Key points
- The agreement is the binding contract. Read it in the order of risk: how the price can move, who bears liability after closing, then what can stop the deal.
- Definitions carry as much money as the price line. How the agreement defines debt, working capital, knowledge and material adverse effect can change proceeds or liability without changing the headline.
- Disclosure schedules are the seller’s protection. A fact listed against a representation is an exception to it, so thorough schedules that match the data room matter.
- A first draft that is stricter than the letter of intent is a retrade in the form of drafting. Compare the two line by line before the first call with the buyer’s counsel.
How a purchase agreement is organized
The purchase agreement is the binding contract that replaces the letter of intent. The letter is largely non-binding and sets the outline. The agreement turns that outline into promises each side can enforce, and what it says controls what either side can claim afterward. It is an asset purchase agreement, a stock purchase agreement or a merger agreement depending on the structure of the deal, and its parts are much the same in each. The buyer’s attorney usually writes the first draft, unless the seller has circulated its own.
Read the agreement in the order of risk, not the order of its pages: first how the price can move, then who bears liability after closing, then what can stop the deal. The table maps each part to the place sellers are most often hurt.
| Part | What it settles | Where a seller gets hurt |
|---|---|---|
| Definitions | What terms such as indebtedness, working capital, knowledge and material adverse effect mean | A broad definition changes proceeds or liability without touching the price line |
| Price and adjustments | The amount, the form of payment, adjustments, escrow and any earnout | Adjustments that take back value after the headline is agreed |
| Representations and warranties | Statements of fact the seller makes about the business | Flat statements with no qualifier, and exceptions left off the schedules |
| Covenants | What each side must do or avoid before and after closing | Operating limits that hamper the business, long restrictions on the owner afterward |
| Conditions to closing | What must be true before either side must close | Conditions that let the buyer walk for reasons it controls |
| Indemnification | Who pays for losses found after closing, and up to what limit | Weak limits, long survival, set-off against deferred payments |
| Termination | When either side can end the agreement and what follows | A buyer with a cheap exit while the seller stays bound |
| Schedules and exhibits | The seller’s disclosures and the forms of the side agreements | Schedules finished late, side agreements nobody reviewed |
Price, adjustments and the closing statement
The price in the agreement is a base figure plus or minus adjustments, and the adjustments are where a headline erodes. The usual ones are debt, cash, transaction expenses and the gap between delivered working capital and the target. The parties close on an estimate. Afterward the buyer prepares a closing statement, the seller has a review period, and an independent accountant settles disputes. The bridge from enterprise value to equity value and the working capital peg guide explain the amounts. In the agreement the risk is in the wording: how debt-like items are listed, whether adjustments run both ways, who prepares the statement, how long the seller has to dispute it and which accounting principles apply.
Illustrative example: Why the accounting principles clause matters
The parties set a working capital target of $4,100,000 using the company’s historical practices, which carry inventory at cost with no reserve for slow-moving items. The agreement then says the closing statement follows generally accepted accounting principles. At closing, delivered working capital is $4,100,000 before the buyer’s accountants add a $250,000 reserve for slow-moving inventory that the historical practice never had. Delivered working capital falls to $3,850,000, so the price falls by $250,000 although nothing about the business changed. A clause that applies the same practices used to set the target, and turns to accounting principles only where those practices are silent, avoids the swing. The figures are invented to show the mechanics and are not benchmarks.
In an asset purchase the agreement also divides the price among the assets. Both the purchaser and the seller of a group of assets that make up a trade or business generally file Form 8594.[1] The allocation schedule therefore deserves the seller’s CPA before signing, because it decides which kind of gain each dollar of price becomes. The guide to purchase price allocation covers the asset classes, and the federal tax guide shows how the layers stack.
Ask counsel. Do the closing statement rules match the practices used to set the target? Do adjustments run both ways? Who prepares the statement, and how long does the seller have to challenge it? If part of the price is an earnout, where do the operating covenants and information rights appear?
Representations, warranties and the disclosure schedules
Representations and warranties are statements of fact the seller makes about the business at signing and usually again at closing. They cover the financial statements, undisclosed liabilities, taxes, material contracts, customers and suppliers, employees, litigation, compliance, intellectual property, real property and inventory. They do two jobs. They allocate risk, because a wrong statement is the basis for a claim after closing. They also force disclosure, because the seller can list exceptions on the disclosure schedules.
- Flat statements. “There is no litigation” is absolute. Qualified by knowledge or materiality, it covers only what the seller knew or what matters. Knowledge should be defined by named individuals and a stated standard of inquiry.
- Scope of the financial statements representation. It should cover the historical statements, not the adjusted EBITDA schedule, the information memorandum or projections. A clause in which the buyer confirms that it relied only on the agreement’s statements keeps marketing materials out of the claims.
- The schedules as protection. A fact listed on a schedule is an exception to the statement, so it cannot be a breach. An item missing from the schedules is an exposure. Data room contents count as disclosure only if the agreement says so.
- Bring-down. The statements are repeated at closing, so a change between signing and closing can make a true statement false.
The seller usually prepares the schedules, because only the seller has the facts, which makes them one of the slower pieces of the document, as the guide to how long a sale takes explains.
Ask counsel. Which statements are flat, and can each be qualified by knowledge or materiality? Who is in the knowledge group? Does the data room count as disclosure? Are the information memorandum and projections excluded?
Indemnification, limits and escrow
Indemnification is the seller’s promise to compensate the buyer for losses from inaccurate representations, broken covenants and specified liabilities after closing. A handful of terms size it: a threshold before claims count, a cap on total liability, how long each representation survives, whether indemnification is the buyer’s exclusive remedy, whether the buyer can recover for a problem it knew about before closing, whether it can set off claims against deferred payments, and how much of the price sits in escrow and when it is released. Fundamental statements, taxes and fraud are commonly carved out of the ordinary limits. The guide to representations, warranties, indemnification and escrows takes each term in turn, and representations and warranties insurance can replace part of the seller’s exposure.
Ask counsel. What are the threshold, cap and survival period for each category? Is indemnification the exclusive remedy except for fraud? Can the buyer set off against deferred payments? What does the escrow secure, and what releases it?
Covenants and conditions to closing
Covenants are promises about conduct. Before closing, the seller usually agrees to run the business in the ordinary course, to seek the buyer’s consent for major actions such as new contracts, large capital spending, pay changes and borrowing, to give the buyer access, and to work on third-party consents. After closing, covenants cover non-competition and non-solicitation, confidentiality, cooperation on taxes and records, and any transition role. The guides to non-competes and non-solicits and to transition periods and post-closing roles cover those.
Conditions to closing decide whether the buyer must close. They commonly include accurate representations at closing, performance of covenants, no material adverse effect, required consents, the absence of a legal block and delivery of closing documents. Three need particular care.
- Material adverse effect. Its definition decides how much of the risk between signing and closing stays with the seller. Sellers ask that it exclude general economic and industry-wide changes.
- Financing. A financing condition lets the buyer decline to close if its lender does not fund, which moves the risk of failure to the seller.
- Consents and filings. Landlords, licensors and key customers may hold consent rights, and the agreement says who must obtain them and what follows a refusal. Antitrust counsel decides whether a premerger notification is needed, and the Hart-Scott-Rodino size-of-transaction threshold is $133.9 million for 2026.[2]
Some deals sign and close on the same day, which removes the gap, the conditions and the termination rights. That works only when no consents or filings are needed.
Ask counsel. Is there a financing condition? How is material adverse effect defined, and what does it exclude? Which consents are conditions, and who must obtain them? What operating restrictions apply between signing and closing?
Termination rights and failed deals
Termination provisions say when either side may leave: by mutual agreement, if closing has not occurred by an outside date, if the other side breaches and does not cure, or if a legal order blocks the deal. They also say what follows. Some agreements require a fee from a party whose own failure, such as a financing failure, ends the deal, and some let the seller force the buyer to close. A seller bound by interim covenants while the buyer has a cheap exit bears the cost of a failed deal alone: a restricted business, employees and customers who know it was for sale, and no alternative buyer. The causes are collected in the guide to why business sales fall apart.
Ask counsel. What is the outside date, and who can extend it? What happens if the buyer’s financing fails? Can the seller require the buyer to close? Is any fee payable by either side?
Checking the first draft against the letter of intent
Drift between the letter and the first draft is common, and it works as a retrade in the form of drafting. Before the first call with the buyer’s counsel, list each term where the draft is stricter than the letter of intent: the definitions of debt-like items and working capital, the escrow size and release, the indemnity limits, the scope and length of the non-compete, the owner’s role, the closing conditions and the earnout mechanics. A term agreed in the letter should be restored. A term the letter left open needs a position. A buyer that cannot point to a diligence finding for a change can be asked to return to the letter, and the guide to retrades after the letter of intent covers the response.
Review the exhibits as well. They are the forms of the escrow agreement, the consulting or employment agreement, the non-compete and any lease, and they are negotiated documents, not formalities for closing day. The guide to how to sell a business places the agreement among the other stages. This page is general education and not legal advice. The seller’s attorney, tax advisor and M&A advisor each review a different part of the draft.
Frequently asked questions
What is in a business purchase agreement?
The price and how it is adjusted, the seller’s representations and warranties, promises about conduct before and after closing, conditions that must be met to close, indemnification for losses after closing, termination rights, and schedules and exhibits. It replaces the largely non-binding letter of intent with the contract that governs what each side can claim.
Who writes the purchase agreement?
Usually the buyer’s attorney prepares the first draft and the seller’s attorney marks it up. Some sellers circulate their own draft with the final-round instructions, so buyers negotiate from the seller’s form. Either way, a first draft that departs from the letter of intent is the first thing to compare and challenge.
What is the difference between representations and covenants?
Representations and warranties are statements of fact about the business at signing and closing, such as the accuracy of the financial statements. Covenants are promises about conduct, such as running the business normally before closing or not competing afterward. A wrong statement can support an indemnification claim, and a broken promise can support a claim for breach.
What is a material adverse effect clause?
A provision that lets the buyer refuse to close, or end the agreement, if the business suffers a serious negative change between signing and closing. Its definition decides how much of that risk the seller keeps. Sellers ask that it exclude general economic and industry-wide changes and require a meaningful standard of harm.
Can a buyer back out after the purchase agreement is signed?
Only under the termination rights and closing conditions in the agreement, such as an unmet condition, a breach the other side fails to cure, or reaching the outside date. A buyer that walks away without such a right may be liable for breach. A financing condition or a broad material adverse effect clause gives a buyer more room to leave, so counsel reviews both.
How long does a seller stay liable after closing?
For as long as the agreement says. Each representation has a survival period, and claims must be made within it. Fundamental representations, taxes and fraud are often carved out and survive longer. The survival periods, the cap and the escrow release date together define the seller’s real exposure, and the seller’s attorney should model them.
Thinking about a sale or an acquisition?
The Impetus Group provides sell-side and buy-side M&A advisory, from preparation and buyer outreach to negotiation and closing. A transactional valuation is often the first step, scoped and priced separately.
Related guides
- How to Read a Letter of Intent: The Terms That Decide What You Receive: A plain-language guide to the letter of intent in a business sale: price, structure, working capital, exclusivity, diligence and the terms that move your proceeds.
- Reps and Warranties, Indemnification and Escrows in a Business Sale: A Seller’s Glossary: How reps and warranties, indemnification, baskets, caps, survival periods and escrows work in a business sale, and how a claim moves from notice to payment.
- Net Working Capital Peg: How the Working Capital Adjustment Works: The working capital peg sets the level of working capital a seller must leave in the business at closing. See how it is calculated, negotiated and adjusted.
- Representations and Warranties Insurance: How R&W Policies Work in a Business Sale: R&W insurance pays the buyer for breaches of the seller’s representations. See how underwriting, retention and exclusions work and what changes for sellers.
- Retrades in M&A: Why Buyers Cut the Price After the LOI and How a Seller Responds: A retrade is a buyer’s price cut after the letter of intent. Learn the fair and tactical triggers, how to prepare, a response playbook and when to walk away.
- How Long Does It Take to Sell a Business? Phase by Phase: How long a business sale takes depends on its slowest phase. See what controls each stage, where delays occur and what shortens the path.
Sources
- Instructions for Form 8594, Asset Acquisition Statement Under Section 1060. Internal Revenue Service. Accessed October 13, 2026.
- New HSR thresholds and filing fees for 2026. Federal Trade Commission. Accessed October 13, 2026.
This guide is general education. It is not a valuation opinion, appraisal, investment advice, or legal or tax advice. How these guides are made.