The purchase agreement is at the heart of every business succession. It is the legally binding contract that seals the sale for good. When shares in a company are sold, it is called an SPA (Share Purchase Agreement). In an asset deal, individual assets change hands instead, such as machinery, customer base and inventory, and the contract is then an APA (Asset Purchase Agreement).
This contract sets out in black and white what is being sold (shares or assets), how high the purchase price is, and when and how it is paid. Often part of the price is due immediately and part later. That later part can be an earn-out, a payment tied to future success, or a seller loan. On top of that come the seller's warranties, rules on liability and its limits, indemnities and a non-compete clause.
There is an important difference between two moments: signing and closing. At signing, the contract is signed. At closing, the business actually changes hands, with all its opportunities and obligations. Both can happen on the same day. They can also be separated in time, if certain conditions still have to be met beforehand, such as a bank's approval.
For some sales the law requires a specific form. When shares in a German or Swiss limited company are sold (share deal), the contract must be notarised. The sale of real estate also requires a notary. A pure asset deal for a small business, by contrast, often works without a notary. It should always be put in writing, though.
As a rule, the purchase agreement builds on an earlier letter of intent. After due diligence, the careful examination of the business, and the negotiations, the purchase agreement then casts everything into a binding form.
For business sellers
As a seller, you give warranties in the purchase agreement. For example that the accounts are correct, that there are no hidden debts, or that the order situation is as described. If it later turns out that an assurance was wrong, you can be held liable for it. That is why it matters so much that the contract sets clear limits on liability: a cap on claims, minimum thresholds, and a time limit after which no more claims can be brought.
The contract often also includes a non-compete clause for you. This means that for a certain period you may not open a competing business nearby. That is fair, because the buyer is also paying for your existing customers. Get good advice here so that the terms stay balanced and you do not promise more than you can genuinely stand behind.
For corporate buyers
As a buyer, the purchase agreement is your most important safety net. Through the seller's warranties you protect yourself against nasty surprises: if after the purchase something turns out not to be as promised, you have a contractual claim. Make sure the warranties are worded concretely and cover the points that mattered to you during due diligence.
You can also agree closing conditions. For example that the transfer only takes place once your financing is in place or key customer or lease contracts have been transferred. That way you do not pay up front before the decisive requirements are met. Instruments such as an earn-out or a seller loan also help you to spread the risk and the financing.
Example
Consider the acquisition of a small joinery: the purchase agreement sets a price of EUR 320,000. Of this, EUR 270,000 is paid at closing, and the remaining EUR 50,000 as an earn-out over two years, depending on whether revenue continues as expected. The seller gives a warranty on the current order situation and commits to a two-year non-compete clause, so that the regular customers really do stay with the new owner.
FAQ
What is the difference between an SPA and an APA?
With an SPA (Share Purchase Agreement) you buy the shares in the company and take over the business as a whole, including its contracts and obligations. With an APA (Asset Purchase Agreement) you buy only individual assets such as machinery, inventory or the customer base. Which option fits better depends on the legal form and the tax situation. The choice between share deal and asset deal therefore shapes the whole structure.
What do signing and closing mean?
Signing is putting your signature under the purchase agreement. Closing is the day on which the business actually changes hands, with all its rights and obligations. The two can coincide. They can also be separated in time, if conditions such as a financing commitment still have to be met beforehand.
Do I need a notary for the purchase agreement?
That depends on what is being sold. Selling shares in a German or Swiss limited company (share deal) requires notarisation, as does the sale of real estate. A pure asset deal for a small business often works without a notary, but should always be put in writing.
Why does a purchase agreement fit the idea of „buy instead of build“?
Because with a purchase agreement you take over an existing, working business, with customers, staff and reputation, instead of starting from scratch. The contract, with its warranties and conditions, ensures that this handover is secure and transparent. That turns „buy instead of build“ into a path with clear rules rather than a leap into the unknown.
What are warranties in a purchase agreement?
Warranties (reps & warranties) are assurances by the seller about the state of the business. For example that the figures are correct, that there are no hidden debts, or that key contracts are valid. If such an assurance turns out to be untrue, the buyer can bring a claim.
What is an earn-out?
An earn-out is a part of the purchase price that is paid only later and depending on the success of the business. It aligns the interests of both sides: if the business does well after the handover, the seller receives the full amount. This is a fair way to bridge differing price expectations.
What is the connection between the LOI and the purchase agreement?
The letter of intent is an early declaration of intent that sets out the rough key points but is not yet a binding sale. The purchase agreement later builds on it and turns the intention into a legally binding arrangement, after due diligence and negotiation.
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