What is a sales and purchase agreement? (With an example)

By Indeed Editorial Team

Published 20 October 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

A sales and purchase agreement (SPA) is a vital contractual document that describes the terms on which the buyer and seller of a property, company stock or other assets have come to an understanding. It outlines the agreed-upon terms of the transaction, offers several significant protections to all parties involved and establishes the legal framework necessary for finalising the sale. Learning what this agreement entails can be useful when you want to buy or sell an asset. In this article, we answer 'What is a sales and purchase agreement?', explain who uses them and list some of their features.

What is a sales and purchase agreement?

A sales and purchase agreement is a contract that legal professionals create for business transactions involving property, mergers, takeovers and large orders. It itemises all transaction terms, implementation, termination and amendments. An SPA is one of the most critical documents in business, which is why only professionals have the skills to create them.

Purchase agreements record the sequence of payments and services provided once the sale is complete. When products or services are no longer required or available, a professional may modify a purchase agreement provided both the buyer and seller consent. Including the responsibility and termination clauses in a purchase agreement helps protect the interests of the seller and buyer and ensures they uphold their obligations.

Related: 8 buying roles in the sales process and what they do

Who uses SPAs?

Many professionals use SPAs, including:

  • escrow officers

  • managing directors

  • buyer's agents

  • brokers

  • suppliers

  • purchasers

Related: What is a GMP contract? (Definition, components, benefits)

Types of SPAs

Corporate legal departments handle all forms of business agreements using SPAs. Here are some of the most typical SPA use cases:

  • Business acquisition: This specifies what the target entity is, whether it's a physical item or an intellectual property.

  • Standard purchase orders: These cover one-time purchases of pricey office supplies and help employers reduce unnecessary expenses. Standard purchase orders help prove that a business bought equipment at the best possible price from the best provider.

  • Blanket sales and purchase orders: These cater to unplanned purchases and allow business owners to seal prices in advance with a seller. With a blanket SPA, owners save precious time and energy for more important duties.

  • Planned supply chain orders: Businesses use this type of contract when regularly purchasing significant quantities of products from a vendor. This SPA improves a business's financial planning and allows the buyer to predict future purchase prices.

  • Contact sales and purchase orders: These SPAs are long-term, legally binding agreements that establish the terms, prices and conditions for all transactions between a business and a vendor. There usually isn't an expiration date or mention of any specific transactions in the contract, but it does serve as the legal foundation for automating further purchases.

Related: What is a partnership agreement, and why does it matter?

Features of SPAs

There are different forms of SPAs with distinct differences, but the fundamental features and provisions of all SPAs are generally the same. The following are the main features:

Parties involved

You list all relevant details of the people or organisations that the SPA lists as buyers or sellers. A business agreement typically has two parties, a buyer and a seller. Regardless of the number of businesses involved, you can label all participants as buyers or sellers. For example, if a public company that multiple shareholders own is up for sale, each shareholder is registered on the sales agreement as the seller.

Transaction agreement

This section is the simplest and shortest in the SPA. It highlights the transfer of title sand shares ownership. With an agreement to sell and purchase, full legal ownership of the asset is appropriately transferred, along with the relevant rights and liabilities attached to the shares. Additionally, this clause specifies whether the shares are free of financial liabilities or not, giving the buyer peace of mind that the seller hasn't committed any of the shares to a bank or another lender.

Payment considerations

This provision describes the SPA's payment terms. You can find the details of financing in this section. These details include the consideration and the form of payment, whether cash, debt, shares or a combination of the three. The buyer can also state whether third-party financing is involved.

Restrictive covenants

SPAs include restrictive covenants that bar the seller from courting other interested buyers. This section explicitly stops the seller from contacting current clients, vendors or staff members and engaging in general competition with the business they're purchasing for a set length of time and within a set geographical area. Ensure these restrictive covenants' duration, extent and geographical application are reasonable. They might break the law regarding competition if they aren't.

Related: What are business valuation methods? (With some examples)

Due diligence on warranties and indemnities

Warranties are factual declarations that a seller makes in the SPA about the target business's status. The buyer can sue for breach of the contract if a warranty later turns out to be false and reduces the company's worth. Warranties cover all aspects of a business, including its accounts, material contracts, legal action, properties, liabilities, intellectual property and debt.

An adequate indemnification often covers additional risks in the SPA, wherein the seller agrees to pay the buyer back for the indemnified responsibility on a pound-for-pound basis. Several of these covenants cover the preservation of the asset and risk reduction. This section describes the seller's obligations if unanticipated litigation affects the transaction. The document confirms the asset's exclusivity, specifies any warranties that can endure through the sale of the asset and specifies any insurance needs that can cover it.

Related: What is contract administration? (Definition and guide)

Termination conditions

The preferred and easiest method of finishing a contract is simultaneous signing and completion when the parties sign the SPA and complete the sale on the same day. Delays between signing and closure are sometimes necessary to satisfy any last unmet prerequisites or conditions precedent. They also include consent from brokers, merger approval from authorities and tax authority clearances.

A sales agreement can be thrown out if either party doesn't meet the agreed conditions, unless the parties agree. Determining when the buyer completes the preceding criteria and when they can't meet them is good practice, which is why the SPA specifies how to do so. By the longstop date, the appropriate party can try to make reasonable efforts to satisfy the pertinent preconditions.

Completion

Once the buyer receives legal ownership of the target company's shares, the transaction is complete. The SPA remains a document to keep close even after the transaction is complete. This is because it details how to handle any earn-out and contains guarantees, indemnities and confidentiality duties.

Confidentiality and non-disclosure agreements

A standard clause in an SPA states that the conditions are sensitive information. Disclosing these conditions to any other parties is not allowed. This clause refers to any earlier non-disclosure agreements signed during previous transaction phases.

Related: What is a void contract? (Definition and common causes)

Examples of SPAs in the marketplace

An SPA is a contract for ongoing purchases, including a recurring monthly delivery of inventories, raw materials or other tangible commodities. This way, the buyer and seller can decide the purchase or selling price in advance, even when scheduling the supply for a later date or spreading it out over time. Purchase agreements aid suppliers and buyers in anticipating demand and costs, and as transaction sizes grow, they become increasingly important.

SPAs are frequently necessary for transactions where one company is buying another. The SPA enables the firm to transfer its tangible assets to a buyer without surrendering the naming rights connected to the business because it describes the precise nature of what is being bought and sold. One of the most frequent uses of SPAs is during property deals. Both parties decide on a final sales price throughout the negotiation phase and supply the closing date and any other pertinent information relevant to the transaction.

Related: How to create a purchase order form (step-by-step guide)

Example of an SPA

Here is an example of an SPA:

Champions Investment Limited (the buyer) enters into a sales and purchase agreement with Energy B Limited (the seller) concerning the outright purchase of all issued and paid shares of Energy B (the target). With this contract, the buyer shall take ownership of the entire issued and paid shares of the target from the seller.

The key terms of this SPA include the following:

  • Valuation: The buyer hired a certified, independent assessor to compile a valuation study on the target. According to the conclusions that the buyer, seller and independent valuation expert reached, the target is worth £590,000.

  • Consideration: The buyer and seller willingly agreed upon the consideration after extensive negotiations with the seller. The buyer pays an agreed 15% discount on the actual valuation of the asset.

  • Transaction payment: Both parties agreed that the buyer may pay the amount due with a combination of shares and cash. The buyer shall issue 1,222,222,000 paid-up shares and £250,000 to the seller.

  • Conditions precedent: The proposed acquisition is dependent upon the satisfaction or waiver of initial conditions for a transaction of this kind, including but not limited to:

    • complete payment and satisfaction of all due diligence exercise on the target by the buyer

    • appointment of individuals that the seller explicitly nominates to serve in core positions post-completion

Please note that none of the companies, institutions or organisations mentioned in this article are affiliated with Indeed.

Disclaimer: The model shown is for illustration purposes only, and may require additional formatting to meet accepted standards.

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