The Purchase Agreement in Business Acquisitions: SPA, Price Mechanisms, and Vendor Loans

What is a Share Purchase Agreement (SPA)?

A Share Purchase Agreement, often referred to as an SPA, serves as the legal foundation for your business acquisition. In this contract, you formalize all agreements between you as the buyer and the seller of the shares. While your initial legal preparation and the guidance of an M&A lawyer have already laid the groundwork for the transaction, the SPA acts as the definitive roadmap for the transfer.

The document regulates not only the purchase price but also the rights and obligations that apply after the transfer. By doing so, you minimize uncertainties and establish a clear framework for the transaction.

How is the purchase agreement structured?

The agreement typically includes extensive warranties regarding the state of the company and its financial position. Additionally, it contains indemnities that protect you against specific risks arising from the past, often identified during the due diligence investigation conducted prior to drafting the final contract.

Other essential components include the conditions under which the sale becomes final, such as approvals from banks or relevant regulators. This structure creates peace of mind and clarity for both parties.

Locked box versus closing accounts

When determining the purchase price, you often choose between two methodologies. The 'locked box' method uses a fixed price based on a historical balance sheet date, allowing you to know exactly where you stand in advance.

Alternatively, the 'closing accounts' method determines the final price after closing, based on the balance sheet at the transfer date. This system provides greater accuracy in valuation but can also lead to more post-closing discussions, sometimes involving earn-out arrangements.

What is a vendor loan?

A vendor loan is a financing instrument where the seller leaves a portion of the purchase price in the company as a loan. This is an effective way to bridge your financing needs as a buyer when a bank cannot provide the full amount.

It often strengthens trust in the deal because the seller remains invested in the company’s success post-acquisition. For you as an entrepreneur, this can provide the necessary liquidity to finalize the deal.

What to look out for in the contract structure?

When drafting the structure, it is essential to balance risk allocation with commercial interests. Ensure that the warranty provisions are well-aligned with the actual state of the business, as buying shares based on inaccurate figures can be a significant risk. Pay close attention to payment terms and any settlement mechanisms. A good contract is not a static document, but a workable instrument that contributes to a successful transition.

Key points to consider

• Verify the warranties for completeness and relevance to your specific sector.
• Make clear choices between locked box and closing accounts to avoid future disputes.
• Record the interest and repayment terms of a vendor loan accurately in the documentation.
• Ensure sufficient collateral is in place when working with a vendor loan.
• Be alert to closing conditions and the acquisition timeline.
• Discuss the tax implications of the chosen price structure with your accountant.
• Ensure that non-compete clauses for the seller are clearly defined.

What should you do now?

Business acquisitions are complex and require legal precision to protect your interests as a buyer or seller. Therefore, engage a corporate lawyer at an early stage to carefully review the SPA and all associated documentation.