Terms in a Purchase Agreement

This is a guide to common purchase agreement terms. It is not legal, tax or financial advice. Review your purchase agreement with your M&A attorney.

The purchase agreement is the binding contract for the sale of your company. It follows the letter of intent (LOI). Depending on how the deal is structured, it may be called a stock purchase agreement, an asset purchase agreement or a merger agreement. Most of its terms start in the LOI. See our letter of intent terms. The purchase agreement sets out the detail, including what happens if something goes wrong after closing. The purchase agreement may be dozens of pages or one hundred plus pages.

The figures below come from studies of private-company deals.

These are the terms in the order you are likely to meet them.

1. Deal structure: stock sale, asset sale or merger

The LOI names the structure, and the purchase agreement is built around it. In a stock sale, the buyer buys your shares and takes the whole company, with all its assets and liabilities. In an asset sale, the buyer picks the assets it wants and leaves most of the liabilities with your company. Buyers usually prefer an asset sale. Sellers usually prefer a stock sale, mostly for tax reasons.[1] In a merger, your company is combined with the buyer’s, often through a buyer subsidiary. A merger can transfer the whole company without every shareholder’s consent, which helps when you have many holders.[2] The tax result depends on the structure and on whether you are a C corp, an S corp or an LLC. Settle the structure with your tax advisor before you sign the LOI.[1] In every structure, check your contracts and leases for consent rights. Many require the other side’s consent when the company is sold, not only when a contract is assigned.[2][3]

2. Representations and warranties

These are statements you make about the company when you sign. They cover the financials, contracts, customers, IP, employees, taxes and more. For a software company, the IP reps get close attention: who wrote the code, who owns it, and what open-source code it uses. A few reps are fundamental, such as your authority to sell and who owns the shares. They get stronger protection for the buyer (see #11 and #12).

3. Disclosure schedules

The schedules do two jobs. Many reps ask you to list things, such as your material contracts, registered IP, employees and benefit plans. Others say “except as listed,” and the schedule lists the exceptions. If a rep says there is no litigation and there is a dispute, you list the dispute.[4] A disclosed exception is generally not a breach. An undisclosed one can be, and it can lead the buyer to walk away or cut the price.[4] Start the schedules early.

4. Covenants between signing and closing

In 2024, about four in ten deals signed and closed the same day.[5] If there is a gap between the two, you agree to run the business as usual until closing. You may need the buyer’s consent to hire senior staff, change prices, sign large contracts or take on debt. Ask for the list of actions that need consent.

5. Closing conditions and material adverse effect (MAE)

These are what must be true before the buyer has to close: your reps are still accurate, you kept your covenants, and required consents are in hand. Many agreements add that no material adverse effect has occurred. An MAE is a serious decline in the business. Nearly all definitions exclude changes in the economy or in your industry as a whole.[5]

6. Working capital adjustment (true-up)

The LOI set a working capital target (peg). Shortly before closing you estimate working capital, and the price paid at closing is adjusted to that estimate. After closing, the buyer prepares the final figure. The agreement gives the buyer a deadline to deliver it, a median of 90 days, and then gives you time to review it.[6] If it differs from the estimate, one side pays the other. These adjustments make up more than half of all post-closing matters in SRS Acquiom’s claims data.[7] Make sure the agreement defines exactly how working capital is calculated.

7. Holdback or escrow

The LOI set the amount held back to cover claims. The purchase agreement sets the release date and what happens to open claims. The median period is 12 months.[8] Money tied to a pending claim stays back until the claim is resolved. Many deals also hold a separate, smaller amount for the working capital true-up, typically about 1% of the price.[6]

8. Flow of funds

The flow of funds lists every payment made at closing: who is paid, how much, and the wire instructions.[15] It is usually a spreadsheet. Typical lines are the debt payoff, fees for bankers and lawyers, the holdback or escrow deposit, and the payments to you and the other holders. This is where the cash-free, debt-free price from the LOI becomes the amount you receive. Check that each holder’s share matches the formula in the purchase agreement. SRS Acquiom says upward of a third of the payout spreadsheets it receives have issues that need clarifying.[16] Confirm every wire instruction by phone with a known contact.[17]

9. Indemnification

This is your promise to cover the buyer’s losses if a rep proves untrue, a covenant is broken, or a listed liability such as pre-closing taxes comes up. The agreement sets how the buyer gives notice and how long you have to dispute a claim. In deals up to $50 million, about one in four had at least one indemnification claim.[7]

10. Basket

The basket is the amount of loss the buyer absorbs before it can claim. With a deductible basket, the buyer recovers only losses above that amount. With a first-dollar basket, once losses pass that amount the buyer recovers all of them. A deductible is better for you. In 2025 deals, 32% used a deductible, 40% used a first-dollar basket and 28% had no basket.[9]

11. Cap

The cap is the most you can owe for breaches of ordinary reps. The median cap is 10% of the deal value.[5] Claims for fraud, and often for fundamental reps, sit outside the cap.[10]

12. Survival period

This is how long the buyer has to bring a claim after closing. In deals of $50 million or less, the median survival period for general reps is 15 months.[11] Fundamental and tax reps often last until the statute of limitations runs.[5]

13. Materiality scrape

Many reps say “material” or “in all material respects.” A materiality scrape ignores those words when a claim is assessed. A single scrape ignores them only to work out the loss amount. A double scrape also ignores them to decide whether there was a breach. In 2024, 86% of deals had a scrape and 60% had a double scrape.[5]

14. Sandbagging

Sandbagging is when a buyer learns of a problem before closing, closes anyway, and then claims for it. A pro-sandbagging clause allows this. An anti-sandbagging clause bars it. In SRS Acquiom’s 2024 data, half of deals had a pro-sandbagging clause, 2% had an anti-sandbagging clause, and the rest said nothing.[5] Silence leaves the question to state law.

15. Reps and warranties insurance (RWI)

RWI is a policy the buyer holds that pays for unknown breaches of your reps. The buyer claims against the policy instead of against you, after a retention that works like a deductible.[18] Insured deals carry much smaller escrows and caps. In 2024 the median cap was 0.35% of deal value with insurance and 10% without.[5] About 46% of deals in SRS Acquiom’s 2026 study used RWI.[9] Insurers will now write policies for deals as small as about $10 million in value.[19] Deals under $50 million use RWI less often. The premium is large relative to the deal, insurers require extensive diligence, and sellers in smaller deals often agree to indemnify instead.[20]

16. Earnout

In deals up to $25 million, 35% included an earnout.[11] If yours does, the purchase agreement sets the targets, how they are measured and when they are paid. Ask whether the buyer can offset indemnity claims against earnout payments. The caution in our letter of intent terms applies. After closing, the buyer decides staffing, investment, support and focus. In deals of $50 million or less where some earnout was paid, the median payout was 43 cents on the dollar. Counting the deals that paid nothing, sellers receive about one in five potential earnout dollars.[12]

17. Seller representative

If your company has several holders, such as cofounders, investors or employees with options, the purchase agreement names one person or firm to act for all of them after closing. The seller representative handles the working capital true-up, earnouts and other issues that come up after closing.[21] It can be a founder, a lead investor or a paid professional firm. A founder who now works for the buyer can end up at odds with the new employer.[22] The sellers set aside an expense fund at closing to pay the representative’s lawyers and accountants.[23] Ask who will serve, how large the fund is, and what happens to any unused balance.

18. Non-compete and non-solicit

You may agree not to compete with the business you sold, and not to recruit its employees or customers, for a set period. In a sale of a business, two to five years is typically enforceable, and three is most common.[13] Whether a non-compete can be enforced, and for how long, depends on state law. The FTC’s 2024 rule banning most non-competes never took effect.[14]

This is a guide to common purchase agreement terms. It is not legal, tax or financial advice. Every deal is different, and a purchase agreement is binding once you sign it. Review any purchase agreement with your M&A attorney before you sign it.

Sources

Fourscore Business Law, “Business Exit Strategy & Business Acquisition Options: Key Considerations”.
Cooley GO, “Selling Your Company: Merger vs. Stock Sale vs. Asset Sale”, updated Jan 19, 2024.
Bagchi Law, “Last Second Questions: When and How to Accept an Offer For Your Startup”, Jan 14, 2025.
Noah Pittard, Cooley GO, “What is a Disclosure Schedule, and Why Do I Need to Prepare One?”, Dec 22, 2025.
SRS Acquiom, 2025 M&A Deal Terms Study, two-page quick reference (2024 deals).
SRS Acquiom, 2026 M&A Working Capital Purchase Price Adjustment Study.
SRS Acquiom, 2024 M&A Claims Insights Report.
Seyfarth Shaw, Middle Market M&A SurveyBook: 2026 Survey of Key M&A Deal Terms, Sept 2026.
Fasken, “Private M&A Deal Trends To Watch: Key Takeaways From SRS Acquiom’s 2026 Study”, May 12, 2026.
ABA Business Law Section, Private Target Mergers & Acquisitions Deal Points Study, 2023 edition.
SRS Acquiom, 2026 M&A Deal Terms Special Report: Lower Middle-Market Deals, as summarized in SRS Acquiom’s M&A Insights newsletter, July 14, 2026.
SRS Acquiom, “M&A Earnout and Milestone Trends”, 2026.
Baker McKenzie, Global Private M&A Guide, United States: Covenants.
Federal Trade Commission, “Federal Trade Commission Files to Accede to Vacatur of Non-Compete Clause Rule”, Sept 5, 2025.
Thomson Reuters Practical Law, “Funds Flow Memorandum (M&A Transaction)”.
Paul Koenig, SRS Acquiom, “The Problems with Pro Ratas”.
Latham & Watkins, “The Pervasive Threat of Business Email Compromise Fraud and How to Prevent It”, Feb 20, 2020.
SRS Acquiom, “Representations and Warranties Insurance”.
Lockton, Transaction Liability Market Update 2025.
Ropes & Gray, PErspectives, May 2025.
Michael J. Kendall, Goodwin, “Recent Case Affirms Protection for Selling Shareholders”, Apr 23, 2014.
Elisheva Paton, SRS Acquiom, “Hidden M&A Risks: What Volunteering as Shareholder Representative Could Cost You”.
Michelle Kirkpatrick and Elisheva Paton, SRS Acquiom, “M&A Expense Funds”.