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When one party decides to buy or sell a business, a structured and legally binding agreement is essential. Among the most important documents in such a transaction is the Share Purchase Agreement (SPA), which outlines terms, protects both the buyer and seller, and mitigates unexpected risks.
- Key Terms in a Share Purchase Agreement SPA
- Determining the Purchase Price and Adjustments
- The Role of Legal Advice and Due Diligence in SPA Negotiations
A well-drafted SPA can help avoid conflicts and ensure the deal reflects the true value of the acquired business.
Key Terms in a Share Purchase Agreement SPA
A share purchase agreement SPA defines the scope of the transaction, including the purchase price, payment terms, and closing date. These agreements often cover key components such as conditions precedent, representations and warranties, specific covenants, and deferred payments. In most cases, due diligence—especially financial due diligence and tax due diligence—is carried out before signing to evaluate the target company’s balance sheets, liabilities, and potential exposure to third party claims or legal proceedings.
To reduce the risk of material adverse changes between signing and completion, SPAs include clauses addressing ordinary course operations, non-compete clauses, and the seller’s promises regarding the future performance of the business. If third party consents or regulatory approvals are required, these must be obtained before completion. Clauses regarding legal compliance and legal protections also help safeguard both parties in case of a dispute resolution process later.
A well-structured SPA M&A agreement plays a crucial role in aligning the interests of all stakeholders involved in a business acquisition.
Determining the Purchase Price and Adjustments
The final price in a SPA may be a fixed price or subject to purchase price adjustments based on completion accounts, working capital, or changes in equity value. Sometimes, additional payments or deferred payments are negotiated to reflect performance-based earn-outs. The negotiation process around these terms can be lengthy, especially when market conditions are volatile or the acquired business has complex financials.
When defining the total purchase price, the SPA outlines how it is to be paid and when, considering factors such as the business’s post-acquisition performance or competing business risks. In case the party breaches the agreed terms under certain circumstances, legal remedies are available, often outlined under law and dispute resolution clauses. The SPA also contains stipulations about what happens if there’s a material adverse effect before the closing conditions are met.
The Role of Legal Advice and Due Diligence in SPA Negotiations
Entering into a legally binding document like a SPA requires careful planning. The parties involved must seek expert guidance to assess legal compliance, tax liabilities, and risks of future legal proceedings. The specific transaction type—whether it’s a share purchase agreement, business sale, or another arrangement—dictates the level of scrutiny required.