Sale and Purchase Agreements – Key Takeaways

Every purchase agreement must include six core components: parties, price, assets, closing terms, warranties, and contingencies

Due diligence before signing is your only chance to verify everything. Once signed, the agreement controls your rights

Tax implications can significantly impact deal economics. Structure the transaction with tax consequences in mind

Common pitfalls include vague asset descriptions, weak indemnification, and missing contingencies. Address these proactively

Professional legal review costs far less than the problems it prevents. Budget 1% to 2% of deal value for proper representation

Quick Definition

A purchase agreement also called a sale and purchase agreement or SPA is a legally binding contract between a buyer and seller that outlines the terms and conditions of the sale for goods, services, shares, real estate, or business assets. Also called a sales agreement, sales contract, purchase and sale agreement, or contract of purchase.

Purpose is to protect both parties and ensure a smooth business transaction from offer to closing date.

Sale and Purchase Agreement – Introduction and Context

A sale and purchase agreement is the workhorse contract that governs the sale of something of value. It can cover a single asset like a van, a package of business assets, shares in a company, or a piece of property. Small businesses use it to record the agreed upon sale price, the timeline, the obligations of each side, and what happens if something goes wrong.

In the United Kingdom, these agreements are widely used in business sales, supply of goods, and property deals. In the United States, the same contract type appears under names like purchase and sale agreement or real estate sales contract for homes and land, and sales contract for goods.

In this guide you will learn the key elements you must include, how due diligence works, tax points to watch, common risks  and FAQs.

Purchase Agreement

A purchase agreement is a legally binding document. Once both parties sign the purchase agreement, the agreement becomes enforceable. It sets the sale process from first signature to completion, and it specifies the conditions that must be met before the sale.

sale and purchase agreement

In English law, a sale and purchase agreement is standard for asset sales and share sales. It is the central file among the signed agreements at closing.

purchase and sale agreement

In the United States, a purchase and sale agreement is often used for real estate deals and major asset transfers. It serves the same function as an SPA.

Contingency Provisions

A contingency allows either party to exit if specific conditions aren’t met. Common contingencies in small business deals include:

• Satisfactory inspection results
• Lease assignment approval
• Key employee retention
• License transfers

Key Components of a Purchase Agreement

Key components of a purchase agreement are the core parts that make the agreement clear, fair, and enforceable. These are the sections of the agreement that must appear for the sale to be legally binding.

Essential elements that must be included:

• Party Identification – The legal names and addresses of the parties involved. Include company numbers for UK companies from Companies House, or state registration details for US entities. Define the buyer and the seller and any guarantor.
• Scope or Subject Matter – A precise outline of the transaction. For goods, list models and quantities. For an asset deal, attach an asset schedule. For shares, state class and number. For property, insert title reference. This section of the agreement also explains what is excluded.
• Purchase Price and Payment Terms – State the sale price, currency, and any adjustments. Include payment method, deposit or earnest money, and closing costs allocation. If there is an earn out, specify calculation and audit rights. The agreement specifies any escrow.
• Timeline and Duration – The closing date, long stop date if any, and any interim covenants. Explain actions buyer and seller must complete before closing.
• Conditions Precedent – Contingency Items that must be met before the sale completes. Examples include financing, landlord consent to assign a lease, regulatory clearance, or board approvals.
• Warranties and Representations – Promises about the business, the goods, the title, and authority to sell. In England, business to business sales of goods may rely on the Sale of Goods Act which implies terms on title and quality, but your warranty section should be explicit. In the United States, the Uniform Commercial Code Article 2 governs sale of goods and allows warranty disclaimers only if they are clear and conspicuous.
• Indemnities and Limitation of Liability – Who pays for specific losses, caps on liability, time limits for claims, and baskets or thresholds.
• Taxes and Apportionments – Who pays stamp duty or stamp duty land tax in the UK, or transfer taxes and sales tax in the US. Set out VAT or sales tax and whether the UK transfer is a transfer of a going concern.
• Completion Mechanics – A checklist of documents to exchange on the closing date such as board minutes, resignations, bill of sale, assignments, and completion statement.
• Termination Clauses – Grounds to terminate before closing and the effect on deposit. Include a right to terminate if key conditions are not met.
• Post Completion Covenants – Non compete, non solicitation, confidentiality, and handover support.
• Dispute Resolution, Governing Law and Jurisdiction – For English deals, choose the courts of England and Wales or arbitration. For US deals, choose a state law such as Delaware or New York.
• Signatures and Execution – Ensure the signed agreement is properly executed by each party and any witness where required.

Due Diligence Verifying the deal before you sign

Due diligence is the process to verify what is included in the purchase, confirm the seller has the right to sell, and assess risks. It protects the buyer and supports a fair sale price.

Focus areas before you sign the purchase agreement:

• Corporate and Title – UK buyers should search Companies House records to confirm directors, charges, and filings. US buyers should run UCC lien searches and state business registry searches. Verify the seller owns the assets or shares and that there are no undisclosed liens.
• Contracts and Assignability – Review customer and supplier contracts. Many agreements need consent before assignment. For leases, check landlord consent rules. For software, check license transfer terms.
• Employees and TUPE – In the UK, the Transfer of Undertakings rules can move staff to the buyer on current terms when buying a business as a going concern. Assess liabilities and consult properly. In the US, employment transfer depends on the deal structure and state law.
• Intellectual Property – Verify registrations at the UK Intellectual Property Office and US Patent and Trademark Office. Check ownership of code and content by assignment from contractors.
• Data Protection – UK buyers should check compliance with the Data Protection Act and UK GDPR, including lawful basis, policies, and breach history. US buyers should review state privacy laws where customers live.
• Financial and Tax – Ask for accounts, tax filings, and confirmation of payments to HMRC or the IRS and state tax bodies. Confirm VAT or sales tax position and any TOGC treatment in the UK.
• Real Property and Equipment – For land in England and Wales, check title at HM Land Registry. In the US, confirm county records. For vehicles, check finance and clear title.

Pro Tip: Build a simple data room and a due diligence checklist. Match each risk to a warranty, an indemnity, a price adjustment, or a closing condition in the SPA.

 

Common SPA Scenarios and Use Cases

These are uses where a sales purchase agreement or purchase contract is essential – examples and applications:

• Business Asset Sale – In the UK, when a cafe owner sells the brand, fixtures, and equipment, the parties use an SPA plus a bill of sale and lease assignment. The TUPE process moves staff. This is common on business transfer agent listings such as Christie and Co and Daltons Business.
• Share Sale – In Sycamore Bidco Ltd v Breslin in the Chancery Division, the court examined breach of warranty claims in a share sale. The case shows why clear wording on warranties, knowledge, and disclosure is vital for a buyer and the seller in any SPA.
• Earn Out Disputes – In Triumph Controls UK Ltd v Primus, the court considered warranty breaches and damages in a business sale. Earn out mechanics and financial reporting clarity are crucial to avoid later disputes.
• Property Deals – In England and Wales, a real estate purchase agreement for a home sale must be in writing and signed under the Law of Property rules. In the US, home buyers sign a real estate sales contract with earnest money held in escrow.
• Termination for Material Adverse Change – The US case Akorn v Fresenius showed that a buyer can walk away if a true material adverse effect occurs and the agreement permits it. Small businesses can learn to define clear outs for serious downturns.

When you absolutely need this contract type If you are transferring ownership of valuable assets, shares, or property, you must use a written and signed purchase agreement to protect both sides and to comply with the law, including the Statute of Frauds rules in both the UK and US for land sales.

Tax Implications

Tax outcomes depend on what you buy and where you buy it. Plan tax early and record it in the SPA.

United Kingdom

• Asset Sale – VAT may not apply if the deal qualifies as a transfer of a going concern. Get clear advice and record the treatment. Stamp duty land tax applies to property.
• Share Sale – Stamp duty on share transfers usually at 0.5% of consideration rounded up. No VAT on shares.
• Seller – Individuals may face capital gains tax. Companies face corporation tax on gains.
• Buyer – Deductible costs and capital allowances may apply on qualifying plant and machinery.

United States

• Asset Sale – Allocation of purchase price under Internal Revenue Code section 1060 using Form 8594.
• Sales Tax – May apply to some assets. Depreciation recapture under sections 1245 one two four five and 1250 may apply to the seller.
• Stock Sale – Often simpler on transfer taxes but different tax profile for both sides.
• Property – State and local transfer taxes may apply.
• Tax Sharing T- he agreement outlines who pays which tax and how the purchase price is allocated.

Critical Risk Areas and Pain Points

These are the main problems that create cost, delay, or disputes in a purchase or sale. Top risks and consequences:

• Vague Scope or Exclusions – If the subject matter is unclear, you can pay for assets you do not receive. Missing asset schedules are a common cause of post closing fights.
• Weak Warranty and Disclosure Framework – Without clear warranties and a disciplined disclosure process, buyers cannot recover for hidden issues. The Sycamore Bidco case shows how wording on knowledge and disclosure matters.
• Earn Out and Adjustment Disputes – Earn outs can motivate performance but they create disputes if definitions of revenue, profit, and accounting policies are loose. Poor drafting leads to audit fights and delayed payments.
• Consents and Conditions Left Open – Failure to secure landlord or key customer consent can kill the deal on the closing date. Missing conditions precedent and contingency planning cause last minute failures.
• Hidden Liabilities – Tax arrears, employee claims under TUPE in the UK, or product liability exposure can destroy deal value if not discovered and priced.
• Common Negotiation Pitfalls – Rushing the timetable, accepting seller friendly liability caps with short time limits, forgetting a clear process for notices and claims, and ignoring data protection and IP assignments.
• Hidden Clauses – Over broad non compete, sandbagging provisions, restrictive disclosure qualifiers, and unusual termination rights that let one side walk too easily.

Practical Solutions and Best Practices

These are steps you can take to protect your business and ensure a smooth closing.

Specific negotiation strategies

1. Start with an outline Agree a clear outline with the main terms and conditions before you draft. This speeds up negotiation and reduces dispute risk.

2. Tie due diligence to the SPA Each risk from diligence should map to a warranty, indemnity, price adjustment, or a condition to close.

3. Calibrate liability Use caps at a fair percentage of the purchase price, baskets for minor claims, and time limits that match risk tails such as tax.

4. Make notices workable Set simple notice rules and addresses. Allow email service where possible.

Must have protective clauses

• Clear asset and share descriptions attached as schedules
• Title and capacity warranties and a fundamental warranty category with higher caps
• Financial statements and no undisclosed liabilities warranty
• Tax covenant and pre closing tax sharing
• IP ownership and data protection compliance warranties
• Covenants on conduct between signing and closing
• Completion statement process with dispute resolution

Red flags to avoid

• Earn out calculations without defined accounting policies
• Disclosure letters with generic phrases that do not reveal specifics
• Conditions precedent that rely on third parties without time for follow up
• Ambiguous governing law and jurisdiction

When to Seek Professional Help

If you are buying or selling a company, a brand, a property, or any transaction where an error could cost more than a modest legal fee, get an experienced lawyer involved. For UK buyers and sellers, seek advice on TUPE and stamp taxes. For US deals, involve counsel on state law and federal tax.

Self Assessment – Answer yes or no. If you answer no to any, pause before you sign.

• Do I have a complete list of assets or shares?
• Have I run lien and title searches?
• Are tax obligations split clearly in the agreement?
• Are warranties tailored to the business?
• Are all third party consents identified as conditions?
• Is the dispute process clear and realistic?
• Is there a provision for material adverse events?
• Have employee issues been addressed?

Note: The above is not a complete list of what you need to consider.

Comparison Table Asset Purchase versus Share Purchase

FAQ Section

Common questions small business owners ask about a purchase agreement.

Q What is the difference between a purchase agreement and a bill of sale

A The purchase agreement sets the terms of the agreement. The bill of sale is the instrument that transfers title to assets at completion.

Q Is a purchase agreement legally binding before closing

A Yes. Once both sides sign, obligations kick in. Some duties apply before closing such as confidentiality, exclusivity, and efforts to get consents.

Q What should a purchase agreement include

A Parties, subject matter, purchase price, conditions, warranties, indemnities, tax, dispute terms, and completion mechanics. These are outlined in the agreement and its schedules.

Q Do I need earnest money or a deposit

A In property deals, a deposit or earnest money is common. In business sales, a deposit is less common but can secure commitment. If used, state when it is refundable.

Q Can I use a standard purchase agreement template

A A template is fine as a start, but you must tailor the key elements to your deal and your jurisdiction.

Q Who pays closing costs

A The agreement specifies closing costs. Market practice varies. State clearly which side pays for taxes, filings, and third party fees.

Q What makes an agreement a legally binding agreement?

A Clear offer and acceptance, consideration, intention, capacity, and certainty of terms. For land, writing and signature are required.

Q What is included in the purchase agreement that protects me?

A Well drafted warranties, indemnities, conditions, and liability caps protect the buyer and the seller in a balanced way.

Q How does a real estate purchase agreement differ from a business SPA?

A Property rules add deposit, searches, and land registry steps. Business SPAs focus on warranties about the business and tax covenants.

Q Is a purchase order the same as a purchase contract?

A A purchase order can be a simple contract for routine goods. A purchase agreement is a full contract used for larger or complex deals.

Q Which parts of a purchase agreement should include time limits?

A Claims for breach of warranty, escrow release, and tax covenants should include clear time limits.

Glossary of Terms

• Purchase agreement The main contract that governs the sale.
• Sale and purchase agreement The same as an SPA often used for business sales.
• SPA Short form for sale and purchase agreement.
• Purchase and sale agreement US term for a purchase agreement often in property deals.
• Sales agreement or sales contract A contract to sell goods, services, or assets.
• Contract of purchase Another name for a purchase agreement.
• Purchase price The agreed upon price for the sale.
• Conditions precedent or contingency Requirements that must be met before completion.
• Warranties Promises about the subject of the sale.
• Indemnity A promise to compensate for specific losses.
• Bill of sale The document that transfers title to assets.
• Completion statement A statement that sets the final price at closing.
• Earn out Payment tied to future performance.
• Closing date The date the sale completes.
• Governing law and jurisdiction The law that applies and the courts or arbitration forum.

Professional disclaimer