A business purchase agreement is the binding contract that transfers ownership of a company from seller to buyer. It spells out the deal structure (asset or stock), the purchase price and how it's paid, the seller's representations and warranties, indemnification terms, closing conditions, the non-compete, working capital true-ups, and the asset schedule listing exactly what changes hands. Everything before it (the CIM review, the financial modeling, the LOI negotiation) is prelude. This document is where the deal becomes legally binding and where mistakes get expensive.
First-time buyers often confuse the LOI with the purchase agreement. They're different documents with different jobs. The LOI is non-binding and sketches the framework. The purchase agreement is the enforceable contract that governs the actual transaction: every representation, every warranty, every dollar amount, every contingency. A $2M acquisition with a sloppy purchase agreement is a $2M bet with no guardrails (I've watched deals unravel on exactly this). This guide covers what each section means, where the real negotiation happens, and what SBA financing adds.
Asset Purchase Agreement vs. Share Purchase Agreement
Before drafting a purchase agreement, you need to decide the deal structure. This is the most consequential structural decision in the entire acquisition, and it affects everything downstream: tax treatment, liability exposure, what transfers, and what doesn't.
Asset Purchase Agreement
In an asset purchase, the buyer acquires specific assets of the business (equipment, inventory, customer contracts, intellectual property, goodwill) and assumes only the liabilities explicitly listed in the agreement. The corporate entity stays with the seller. You're buying the parts. The container stays behind.
This is the default structure for SBA-financed small business acquisitions, and for good reason. The buyer gets a clean start. No inherited lawsuits, no undisclosed tax obligations, no forgotten vendor disputes. If it's not listed in the asset schedule, it's not yours, and neither are the problems attached to it.
Asset purchases also give the buyer a stepped-up tax basis on the acquired assets. That means you can depreciate the purchase price across the asset categories (equipment, goodwill, non-competes) and deduct those expenses over time. On a $2M acquisition, the tax benefit of a stepped-up basis can be worth $200K to $400K over the depreciation period.
The downside: some contracts, licenses, and permits can't be transferred in an asset sale. They're tied to the entity. You'll need to negotiate new agreements or apply for new permits, which takes time and introduces closing risk.
Share Purchase Agreement (Stock Purchase)
In a share purchase agreement, the buyer acquires the ownership interest in the entity itself: the LLC membership interests or corporate stock. The entity continues to exist. Contracts, licenses, and permits remain in place. Employees stay employed by the same entity.
The catch: you inherit everything. Every liability the company has ever created, known or unknown. Pending litigation, environmental exposure, tax disputes, employee claims. All of it transfers with the shares. The seller walks away clean. You own the full history.
Sellers often prefer stock purchases because they get favorable capital gains treatment on the sale proceeds. In an asset sale, the purchase price gets allocated across asset categories, and some of those categories (like inventory) are taxed as ordinary income rather than capital gains. A seller on a $3M deal might save $100K to $200K in taxes with a stock structure.
That tax delta creates a negotiation dynamic. The seller wants stock. The buyer wants assets. The resolution is usually one of three outcomes: the buyer accepts a stock purchase with enhanced representations and warranties, the seller accepts an asset purchase at a slightly higher price, or the parties use an IRC Section 338(h)(10) election to get the legal simplicity of a stock sale with the tax treatment of an asset sale.
Which Structure for SBA Deals?
Asset purchases dominate SBA-financed acquisitions. Most SBA lenders prefer them because the collateral position is cleaner and the liability exposure is defined. Some lenders will finance stock purchases, but expect additional due diligence requirements and potentially stricter terms. Confirm your lender's preference before committing to a structure in the LOI.
Model your deal structure before negotiating
Use the free SBA calculator to stress-test purchase price, down payment, and seller note scenarios under different deal structures.
Open the SBA calculatorKey Sections of a Business Purchase Agreement
Whether you're working with an asset purchase agreement template or a share purchase agreement, the core sections are similar. Your attorney drafts the actual language. Your job is understanding what each section protects and where the negotiation leverage sits.
Purchase Price and Payment Terms
The purchase price section specifies the total consideration, how it's allocated, and the payment mechanics. For an SBA-financed deal, this typically breaks down into three components: SBA loan proceeds (75 to 90% of the price), a seller note (5 to 15%), and the buyer's equity injection (10 to 15%).
Price allocation matters for taxes. In an asset purchase, the total price gets allocated across IRS asset classes (Class I through Class VII under IRC Section 1060). Goodwill (Class VII) is amortized over 15 years. Equipment (Class V) can be depreciated faster. Both parties file Form 8594 with the same allocation, and disagreements here can create audit risk.
Get the allocation agreed upon in the purchase agreement, not left for later. Sellers want more allocated to goodwill (capital gains). Buyers want more in depreciable categories (faster tax deductions). An experienced CPA should model the tax impact before you agree to allocation numbers.
Assets Included and Excluded
The asset schedule is one of the most important exhibits in the purchase agreement. It lists every asset that transfers at closing, and (just as critically) what doesn't transfer. Be exhaustive. Ambiguity here creates post-close disputes.
Common inclusions: equipment and machinery, vehicles, inventory, customer lists, intellectual property (trademarks, trade names, domain names), phone numbers, websites, non-compete agreements, and goodwill. Common exclusions: cash and bank accounts, accounts receivable, the seller's personal assets, real estate (often handled in a separate lease), and specific liabilities.
Walk the physical premises before finalizing this schedule. A surprising number of post-close disputes involve equipment the buyer assumed was included and the seller assumed was personal property. If the seller's personal truck sits in the shop and gets used for deliveries, clarify who keeps it.
Representations and Warranties
Representations and warranties (reps and warranties) are factual statements the seller makes about the business. They're the foundation of your legal protection if something turns out to be different from what you were told.
Standard seller reps cover: accuracy of financial statements, absence of undisclosed liabilities, compliance with laws and regulations, validity of contracts, condition of assets, tax compliance, employee matters, environmental compliance, and absence of litigation. Each rep is a statement of fact that the seller certifies is true as of closing.
The negotiation here is about scope, qualifiers, and survival period. Sellers want narrow reps qualified by "to the seller's knowledge" with short survival periods (12 months). Buyers want broad, unqualified reps that survive for 2 to 3 years or longer. The compromise depends on deal size, leverage, and how thorough your due diligence has been.
Pay special attention to the "fundamental reps" (ownership of shares/assets, authority to sell, and absence of fraud). These should survive indefinitely or until the statute of limitations expires. Never agree to a short survival period on fundamental representations.
Indemnification Provisions
Indemnification is the mechanism that gives reps and warranties teeth. If a representation turns out to be false and you suffer a loss, the indemnification section defines how you recover: the process, the caps, the baskets, and the time limits.
Key terms to negotiate: the indemnification cap (typically 10 to 25% of the purchase price for general reps, with no cap for fraud), the basket or deductible (often 0.5 to 1% of the purchase price; claims below this threshold aren't recoverable), the survival period (how long you have to bring a claim), and whether the basket is a true deductible or a tipping basket (once exceeded, you recover from dollar one).
On a $2.5M deal, a 15% indemnification cap means the maximum recovery for non-fraud rep breaches is $375K. A 1% basket means you absorb the first $25K in losses before indemnification kicks in. These numbers matter. Fight for terms that reflect the actual risk profile of the deal.
Closing Conditions
Closing conditions define what must be true or completed before the deal can close. They protect both parties from being forced to close a deal that no longer makes sense.
Standard buyer closing conditions: SBA loan approval and funding, accuracy of seller representations at closing (not just at signing), absence of material adverse change, completion of due diligence to buyer's satisfaction, landlord consent to lease assignment, third-party contract consents, regulatory approvals, and delivery of all closing documents.
The financing contingency is critical for SBA buyers. If the SBA loan falls through (the lender declines, the valuation comes in low, rates move beyond acceptable terms), the financing condition lets you walk away without penalty. Never waive this condition for an SBA deal.
Non-Compete and Non-Solicitation
The non-compete prevents the seller from starting or joining a competing business after closing. The non-solicitation prevents them from poaching your customers and employees. Both are essential. A seller who builds the same business across town with the same customer relationships can destroy the value you just paid for.
Enforceability varies by state. California severely limits non-competes. Other states enforce them if the scope is reasonable: defined geography, defined industry, limited duration. Standard terms are 3 to 5 years within a 50 to 100 mile radius or the business's existing service area, whichever is broader.
SBA lenders typically require non-compete agreements as a condition of loan approval. The lender doesn't want to finance a business where the seller can immediately compete and erode revenue. Factor this into your purchase agreement negotiation. The non-compete is a financing requirement on top of being a buyer protection.
Working Capital Adjustment
Working capital (current assets minus current liabilities) determines whether the business has enough cash to operate from day one. The purchase agreement should define a working capital target (the expected amount at closing) and a true-up mechanism for post-close adjustment.
The typical approach: define a target based on trailing 12-month average working capital. At closing, estimate the actual working capital. Within 60 to 90 days post-close, calculate the final number from a closing balance sheet. If actual working capital is below the target, the seller pays the difference. If it's above the target, the buyer pays the difference.
First-time buyers frequently skip this section entirely. Then they close on a business and discover the seller drained the accounts receivable, delayed paying vendors, and left them with $150K less working capital than the business needs to operate. A properly drafted working capital mechanism prevents this.
Transition Period Terms
The transition section defines the seller's post-close obligations: duration, availability, compensation (if any), and scope of support. Standard terms range from 2 weeks for simple businesses to 90 days for complex, owner-dependent operations.
Be specific. "Seller will provide reasonable transition assistance" is unenforceable and meaningless. Instead: "Seller will be available 20 hours per week for 60 days following closing to introduce Buyer to key customers and vendors, train Buyer on operational systems, and transfer institutional knowledge. Seller will respond to Buyer inquiries within 24 hours."
Compensation during transition is negotiable. Some sellers provide transition support as part of the deal. Others expect a consulting fee ($150 to $300/hour is common). If the seller note includes a standby period, consider structuring unpaid transition support as part of the seller note arrangement. It aligns incentives.
SBA-Specific Requirements
SBA financing adds specific requirements to the purchase agreement that don't exist in cash or conventionally financed deals. Your attorney needs to know these upfront, before the agreement is drafted. For a complete breakdown of how SBA loans work, see the SBA 7(a) loan guide.
Standby Seller Note
If the deal includes a seller note (and most SBA acquisitions do), the SBA requires it to be on "full standby" for a minimum period, typically 24 months. Full standby means the seller receives no principal or interest payments during that period. The SBA loan gets priority on all cash flow.
The purchase agreement must reflect these standby terms. The seller note terms (interest rate, total term, standby period) need to match what the SBA lender has approved. Mismatched terms between the purchase agreement and the SBA authorization can delay or kill closing. Run the seller note scenarios through the SBA calculator before finalizing terms.
Life Insurance Requirement
The SBA requires the buyer to obtain a life insurance policy equal to the loan amount, with the lender named as beneficiary. This protects the lender if the buyer dies before the loan is repaid. The purchase agreement typically includes this as a closing condition.
Don't wait until the week before closing to apply for life insurance. The underwriting process takes 4 to 8 weeks, and health issues can delay or complicate approval. Start the application as soon as the LOI is signed.
Personal Guarantee
SBA 7(a) loans require a personal guarantee from anyone owning 20% or more of the acquiring entity. This is non-negotiable. The purchase agreement should acknowledge the guarantee requirement and ensure the buyer's entity structure aligns with what the SBA lender requires.
The personal guarantee means your personal assets are at risk if the business fails and can't service the debt. This is the reality of SBA financing. You're not buying with limited liability in any meaningful sense. Factor this into your risk assessment and make sure the deal economics justify the personal exposure.
SBA Loan Authorization Terms
The SBA lender issues a loan authorization letter that specifies conditions the purchase agreement must satisfy. These might include: specific insurance requirements, environmental assessments for certain property types, minimum working capital at closing, required non-compete terms, and restrictions on seller note structure. Your attorney should review the SBA authorization letter alongside the purchase agreement to ensure compliance.
Negotiation Tactics for First-Time Buyers
The purchase agreement negotiation is different from the LOI negotiation. The LOI is about broad strokes (price, structure, timeline), and getting it right early sets up everything downstream, so it's worth reading how to write an LOI before you get here. The purchase agreement is about the specific language that protects you when something goes wrong. Here's where I focus.
Push Hard on Reps and Warranties
This is the single most important negotiation in the entire agreement. Broad, unqualified representations with long survival periods are your primary protection against undisclosed problems. Don't let the seller narrow them to meaninglessness.
Specific battles worth fighting: remove "to seller's knowledge" qualifiers on factual representations (the seller knows whether their financial statements are accurate), extend survival periods to at least 18 to 24 months for general reps, and insist on indefinite survival for fundamental reps and fraud.
Secure a Meaningful Escrow
An escrow holdback (5 to 10% of the purchase price held by a neutral third party for 12 to 18 months) gives you actual funds to draw against if a rep turns out to be false. Without escrow, your only remedy is suing the seller, which is expensive and uncertain.
On a $2M deal, a 7.5% escrow means $150K sits in a controlled account. If you discover $80K in undisclosed liabilities six months after closing, you can recover from escrow without litigation. That protection is worth the negotiation effort.
Don't Concede on the Working Capital Mechanism
Sellers sometimes resist working capital adjustments because they want closing certainty (a fixed price with no post-close true-up). Resist the temptation to simplify. Without a working capital mechanism, the seller has every incentive to milk the business dry between signing and closing: collecting receivables, delaying payables, stripping cash.
Know When to Concede
Not every provision is worth fighting over. Reasonable concessions: slightly shorter survival periods on non-fundamental reps (18 months instead of 24), a modest basket on indemnification claims, the seller's preferred form of escrow agreement. These concessions cost you relatively little and build goodwill for the provisions that actually matter.
The goal is a deal that closes, with documents that protect you. Experienced attorneys know which battles are worth fighting. Let yours guide the strategy.
Common Mistakes
Using a Generic Business Purchase Agreement Template
Templates from legal websites are starting points. They aren't final documents. They don't account for your state's law, your deal structure, your SBA lender's requirements, or the specific risks of the business you're buying. A template for a $500K cash deal in Texas doesn't work for a $3M SBA-financed deal in California.
Insufficient Due Diligence Before Signing
The purchase agreement memorializes what you learned in due diligence. If your DD was superficial, your reps and warranties won't cover the right risks. The purchase agreement is only as strong as the diligence that informed it. See the due diligence checklist for what to verify before the purchase agreement is finalized.
Ignoring Post-Close Mechanics
The purchase agreement doesn't end at closing. Working capital true-ups, escrow release conditions, indemnification claim procedures, non-compete enforcement. These all play out over months or years post-close. Buyers who focus only on getting to closing often discover their post-close protections are weak or unenforceable.
Not Aligning the Purchase Agreement with SBA Authorization
The SBA lender issues a loan authorization with specific conditions. If the purchase agreement contradicts those conditions (wrong seller note terms, missing non-compete, inadequate insurance requirements), the lender won't fund. This kills deals at the finish line. Have your attorney cross-reference the SBA authorization letter against every relevant provision in the purchase agreement.
Skipping the Asset Schedule Review
The asset schedule is an exhibit, not the main agreement, and it gets less attorney attention than it deserves. Review it line by line. Walk the business premises with the schedule in hand. If a piece of equipment generates revenue and it's not on the schedule, it doesn't transfer. You'll find out after closing when the seller asks for it back.
When to Use an Attorney and What It Costs
The purchase agreement is not a document you draft yourself. Even experienced acquirers use business acquisition attorneys for the definitive agreement. The complexity of reps and warranties, indemnification mechanics, and state-specific requirements makes professional drafting essential.
What to look for in an attorney: experience with small business M&A (not corporate mega-deals), familiarity with SBA-financed transactions, and a fixed-fee or capped-fee arrangement rather than purely hourly billing. An attorney who has closed 50 SBA acquisitions will catch issues that a generalist won't.
Typical costs: $8K to $20K for the buyer's side of a purchase agreement on a $1M to $5M deal, depending on complexity and geography. This covers drafting or reviewing the purchase agreement, negotiating seller's attorney's markup, preparing closing documents, and attending closing. On a $2.5M acquisition, $15K in legal fees is 0.6% of the purchase price. Reasonable insurance against a six-figure mistake.
Engage the attorney early, ideally at the LOI stage. Waiting until after due diligence is complete means rushing the most important document in the transaction. The attorney's input on LOI structure influences the purchase agreement negotiation.
The purchase agreement is one step in a longer process. To see where it fits (from screening deals and running diligence through to the closing table), read the complete guide to buying a small business. And before you finalize any agreement, work the due diligence checklist so your reps and warranties cover the risks you actually found.