The Business Purchase Agreement

What the agreement is doing

Diligence tells you what you think is true. The purchase agreement decides what happens if you were wrong. That is the entire function of the risk-allocation clauses: the seller states a set of facts, you rely on them, and the agreement determines the remedy if a stated fact turns out to be false. Whether the document is titled an asset purchase agreement or a stock purchase agreement, the machinery is the same — only the thing being conveyed changes, which is covered in asset purchase vs stock purchase.

Representations and warranties

The seller's representations are the backbone. In a small-business deal they typically cover: the financial statements fairly present the business; there are no undisclosed liabilities; taxes have been filed and paid; there is no pending or threatened litigation; the company owns the assets free of liens; it holds the licenses required to operate; it complies with applicable law; there are no undisclosed employee claims; material contracts are valid and in force; and no material adverse change has occurred since the last financial statement.

Three technical points determine how much any of this is worth:

• Knowledge qualifiers. A representation given “to the seller's knowledge” is far weaker than a flat statement, because the seller only breaches if they knew. Sellers ask for knowledge qualifiers everywhere; resist them on facts the seller is genuinely in a position to know, such as taxes, litigation, and title to assets.
• Materiality qualifiers. The same dilution in a different form. Expect them on catch-all reps; resist them on financial statements.
• Survival period. Representations expire. Twelve to twenty-four months is typical for general reps in small deals, with longer or statute-linked survival for tax, title, and authority. Survival matters more than the reps themselves: a tax exposure that surfaces at month twenty against a twelve-month survival period is your problem, not the seller's.

The disclosure schedules are the other half of this section, and buyers under-read them. Each schedule lists exceptions to the reps — the pending claim, the lease that is month-to-month, the customer on notice, the equipment under lien. Anything disclosed there is, by definition, not a breach. Read the schedules with the same attention as the agreement; they are the seller's written admission of the things you would otherwise sue over.

Indemnification: caps, baskets, and who actually pays

Indemnification is the remedy that gives representations teeth. The structure is conventional:

• The basket (or threshold). A minimum amount of aggregate losses before the seller owes anything, so neither side litigates trivia. It is either a deductible — the seller pays only the excess — or a tipping basket, where crossing the threshold makes the whole amount recoverable. The difference is real money; buyers prefer tipping.
• The cap. A ceiling on the seller's total exposure, commonly a percentage of the purchase price in small deals. Fundamental representations — title, authority, taxes — are usually carved out and capped at the full purchase price or excluded entirely.
• Exclusive remedy. Most agreements make indemnification the sole remedy for breach, with carve-outs for fraud. Read that clause; it defines whether you have any path outside the cap.

The clause is only as good as the person behind it. A seller who takes the proceeds, retires, and moves is a poor indemnitor regardless of what the cap says. That is why the escrow matters more than the drafting.

Escrow and holdback

An escrow parks part of the purchase price with a third party for a defined period, and it is the single most effective buyer protection in a small deal because it converts a promise into cash you can reach. Negotiate three things: the amount, the release period, and whether release requires the seller's consent or only the absence of a noticed claim.

A seller note can serve a similar function when the agreement includes a right of offset, letting you reduce note payments by the amount of an indemnifiable loss. That is one of the strongest reasons to structure seller financing into the deal beyond the cash-flow benefit — our seller financing guide covers the note terms. Note that when the note is on SBA standby, offset mechanics interact with the standby agreement, so raise it with your lender rather than assuming.

The working capital peg — the clause buyers skip

Most small businesses are sold on a cash-free, debt-free basis with a “normal” level of working capital delivered at closing. Without that provision, a seller can behave entirely rationally in the weeks before closing: collect receivables aggressively, stop reordering inventory, and stretch payables. They deliver exactly the assets the agreement lists, and you start day one funding a working capital hole out of pocket — frequently a larger number than the price concession you negotiated so hard for.

The fix is a target, usually set from a trailing average of the business's own historical working capital, with a post-closing true-up that adjusts the price dollar-for-dollar against the actual figure at closing. Three details make it work: define the components precisely, state the accounting principles used to calculate them so both sides measure the same way, and set a short deadline and a dispute mechanism — typically an independent accountant — for resolving disagreement. Where a peg is genuinely inappropriate, as with a business carrying no receivables, replace it with explicit provisions on inventory count and valuation, prepaid customer deposits, and proration of rent, utilities, and payroll at closing.

Closing conditions and the covenants in between

Signing and closing are usually separated by weeks, and two clause families govern that gap. Closing conditions are what must be true before you are obligated to fund: your financing commitment issued, landlord consent to lease assignment obtained, required licenses transferred or issued, key employees signed, third-party consents delivered, and the representations still accurate at closing. Interim covenants govern seller behavior in the meantime: operate in the ordinary course, do not raise wages or sign long-term contracts, maintain insurance, keep the assets, and grant continued access.

Also expect a no-shop carried forward from the letter of intent, and a clear statement of each party's termination rights and what happens to any deposit.

Non-compete, non-solicit, and the transition

You are largely buying goodwill, and goodwill walks. The agreement should include a covenant not to compete of a duration and geographic scope reasonable for the business, a non-solicitation covenant covering customers and employees, and a defined transition-services or training commitment stating hours, duration, and whether it is paid separately or included in the price.

Two practical notes. Restrictive covenants are governed by state law and the enforceability of non-competes has been an active and shifting area — scope them with counsel licensed where the business operates rather than copying a template. And when the seller is staying on in any capacity, put it in a separate written agreement with defined duties and an end date. Vague expectations about the founder “helping out for a while” are the most common source of post-closing friction in small acquisitions.

How to spend your legal budget

On a small acquisition, legal fees are a meaningful percentage of the deal, so direct them where the exposure is. Have counsel focus on the disclosure schedules, the survival and indemnity package, the escrow, the working capital mechanics, and the closing conditions tied to your financing. Read the schedules yourself — you know the business better than your attorney does, and you are the one who will notice that the “minor” disclosed dispute involves the customer that produces a fifth of revenue. And keep your lender's counsel in the loop throughout, because a lender-required change to the seller note or standby structure late in drafting is a routine cause of delayed closings; the sequencing is covered in our SBA acquisition guide.

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