TL;DR: The business purchase agreement turns a handshake into a closing. It defines price, structure, risk, and remedies. According to SearchFundMarket, the most contested sections are reps and warranties, indemnification caps, and the working capital adjustment. Most first-time operators spend too much energy on the LOI and not enough on the document that actually binds both parties.
You signed the LOI. Exclusivity is running. Due diligence is done. Now your attorney sends over the purchase agreement: 80 to 150 pages of dense legal language governing the deal long after the champagne is gone.
This is where most ETA operators lose ground. Not because they are not smart. Because they have not seen enough of these documents to know which sections are boilerplate and which will haunt them.
What a Business Purchase Agreement Is
A business purchase agreement (also called a definitive purchase agreement, purchase and sale agreement, or PSA) is the binding legal contract that transfers ownership of a business. It operationalizes the non-binding LOI with specific legal language covering price mechanics, risk allocation, closing conditions, and post-closing obligations.
The LOI sets the deal. The BPA executes it.
Buyers who treat these as separate negotiations, signing the LOI quickly to preserve momentum and then fighting in the PSA, consistently lose value on terms they failed to anchor early. The indemnification cap, the working capital peg, the length of seller's non-compete: these should be addressed in the LOI, not discovered for the first time in a 120-page first draft.
APA vs. SPA: Choose the Right Structure First
Every business purchase agreement takes one of two forms. This decision shapes everything that follows.
Asset Purchase Agreement (APA): You buy specific assets and assume specific liabilities. The seller's legal entity stays behind. You get a fresh start with a stepped-up tax basis on acquired assets, and you can leave unknown liabilities with the seller's entity.
Share Purchase Agreement (SPA): You buy the ownership interests of the entity itself. The company continues with all its contracts, licenses, employees, and liabilities intact.
For search fund and self-funded ETA deals under $10 million, APAs are more common. They give first-time operators protection from historical liabilities they cannot fully diligence. SPAs make sense when contracts or licenses are non-assignable, or when the seller insists on equity treatment for tax reasons.
SBA-financed deals add another layer. Some lenders require entity continuity, pushing toward an SPA. Review your lender's requirements before locking in structure at the LOI stage, not after.
The Five Sections That Decide the Deal
1. Purchase Price and Working Capital Mechanics
The purchase price is rarely a flat number. Expect a working capital adjustment, a post-closing true-up comparing actual working capital at closing against an agreed target peg. The peg is typically the trailing 12-month average of current assets minus current liabilities.
This is the number one source of post-closing disputes. Define what is included in the calculation precisely. Sellers strip cash or stuff payables before close. Buyers find themselves undercapitalized on day one. Neither outcome is acceptable.
The consideration section also covers seller notes, earnouts, and holdbacks. If the seller is carrying a note, the promissory note attaches as an exhibit and must align with any SBA subordination requirements. Earnouts bridge valuation gaps but are litigation-prone. Define the metric, the measurement period, and the buyer's operating obligations with zero ambiguity.
2. Representations and Warranties
Representations and warranties (reps and warranties) are the seller's factual statements about the business. A typical PSA includes 30 to 50 reps covering financial statements, tax compliance, material contracts, intellectual property, employee matters, litigation, environmental compliance, and regulatory status.
These are your primary protection against unknown liabilities. If a rep turns out to be false after closing, you have an indemnification claim.
Sellers negotiate two qualifiers to limit exposure. Knowledge qualifiers narrow the rep to what the seller actually knew. Materiality qualifiers require a breach to be significant before triggering a claim. Push back on both. Financial statements and tax reps should carry no materiality qualifier.
Reps do not last forever. Survival periods specify how long each category remains enforceable after closing. Per SearchFundMarket's analysis of the ABA's 2024 Private Target M&A Deal Points Study, general reps survive 12 to 18 months in most lower middle-market deals. Fundamental reps covering organization, ownership, and capitalization typically survive indefinitely or six years. Tax reps follow the applicable statute of limitations.
3. Disclosure Schedules
Disclosure schedules are attachments listing specific exceptions to the reps. A lawsuit disclosed on Schedule 4.10 is not a breach. An undisclosed lawsuit is.
This is where post-closing disputes are won or lost. Sellers want broad, sweeping schedules that shift known problems to the buyer. Buyers want narrow, specific schedules that preserve their ability to make claims. Read every line. A disclosed problem is generally not actionable. An undisclosed problem is.
4. Indemnification
Indemnification is the remedy mechanism when a rep is breached. Three variables drive the economic outcome.
Cap: The maximum the seller can owe for general reps. Standard in the lower middle market is 10 to 25 percent of the purchase price, with higher percentages on smaller deals. Fundamental reps covering title, authority, and taxes are typically uncapped or capped at 100 percent of purchase price.
Basket: The threshold before claims count. Negotiate a deductible basket structure rather than a tipping basket. In a deductible basket, you recover all losses once the threshold is exceeded, not just the excess above it.
Survival period: The window to bring a claim. Align the escrow release schedule with survival periods. Do not let the escrow expire before the general reps do.
In most lower middle-market deals, 10 to 20 percent of the purchase price goes into third-party escrow at closing. For deals above $10 to 15 million, representations and warranties insurance is worth evaluating: coverage for rep breaches at a premium of 2 to 4 percent of the policy limit. Below that threshold, a well-structured escrow provides adequate protection.
5. Closing Conditions
Closing conditions are the checklist that must be satisfied before funds transfer and ownership changes hands.
Standard buyer-side conditions include accuracy of seller's reps at closing, absence of a Material Adverse Change, receipt of required regulatory approvals, landlord consent for lease assignment, and key customer consents for material contracts. SBA-financed ETA buyers must include a financing condition. Without one, an SBA denial leaves the buyer in default with no exit.
Lease assignment is a common deal-killer. Most commercial leases require landlord consent. Some include change-of-control clauses that trigger on stock purchases. Review every lease before the LOI is signed, not at closing.
ETA-Specific Provisions You Cannot Ignore
Search fund and self-funded ETA deals carry structural elements that do not appear in standard M&A templates.
SBA compliance representations. If you are using SBA 7(a) financing, the purchase agreement should include reps that the transaction structure complies with SBA requirements. A breach of an SBA compliance rep post-closing can affect your loan in ways ordinary indemnification does not cover.
Seller note subordination. If the seller is carrying a note, the PSA must attach the promissory note as an exhibit and address its subordination to the senior lender. SBA regulations require seller notes to be on full standby for a minimum period. Any inconsistency with the SBA lender's requirements must be resolved before closing, not at the table.
Rollover equity. If the seller retains a minority stake post-close, the PSA must address treatment, rights, and vesting. These terms must align with the acquisition operating agreement. SBA restrictions on seller equity retention require specific compliance review.
What Sellers Need to Understand
Business owners often assume the hard part is done after the LOI is signed. It is not. The working capital peg can shift the effective purchase price by hundreds of thousands of dollars in either direction. The indemnification cap and survival period determine how long you remain exposed. The non-compete clause governs your next five years. Sellers who resist making substantive representations at the LOI stage create problems at the PSA stage. If a seller cannot represent that the financials are accurate, that is a signal, not a negotiating posture.
Timeline and Final Note
From first draft to execution typically takes 4 to 8 weeks: 1 to 2 weeks for the initial draft, then 2 to 4 rounds of markup between counsel. In most ETA deals, signing and closing occur simultaneously. There is no gap between execution and funding. Do not let late-breaking issues push you to close on terms you have not fully negotiated.
Read PGC's earlier breakdown of search fund LOIs alongside this piece. The LOI sets the economic framework the BPA executes.
Frequently Asked Questions
What is the difference between an APA and an SPA in a business acquisition?
An Asset Purchase Agreement lets you buy specific assets while leaving liabilities with the seller's entity. A Share Purchase Agreement transfers the entire legal entity with all its assets, liabilities, and contracts intact. APAs are more common in ETA deals under $10 million because they protect buyers from unknown historical liabilities. SPAs apply when contracts or licenses are non-assignable or when the seller requires stock treatment for tax reasons.
How long do representations and warranties survive after closing?
General representations typically survive 12 to 18 months. Fundamental reps covering ownership, authority, and capitalization survive indefinitely or up to 6 years. Tax representations follow the applicable statute of limitations, usually 3 to 4 years. Align escrow releases with survival periods so the holdback remains available when you actually need it.
What is a working capital peg and why does it matter?
The working capital peg is the agreed target for working capital the business should have at closing. If actual closing working capital falls short of the peg, the purchase price is reduced. If it exceeds the peg, the buyer pays the seller the surplus. This is the most common source of post-closing disputes. Define what is included in the calculation precisely in the purchase agreement before signing.
Do ETA buyers need a financing condition in the purchase agreement?
Yes, if you are using SBA 7(a) financing. A financing condition lets you terminate the agreement if your financing falls through. Without one, an SBA denial puts you in default with no exit. Sellers will push back and some require a break fee. For SBA-financed acquisitions, the financing condition is not optional.
EOD pattern recognition applies here: identify the threat, understand the mechanism, make the call with full information. Know the cap, know the basket, know what you are taking on before the wires go out.
Patriot Growth Capital acquires, mentors, and invests in lower-middle-market businesses. PGC does not provide legal advice. Consult qualified legal and financial advisors before any acquisition decision.
