Sale and purchase agreement
M&A / Merger ModelThe contract governing the transaction: what is being sold, for how much, on what promises, and what happens between signing and completion.
Also written: SPA, share purchase agreement
The SPA sets out the price and its adjustment mechanism, the warranties and indemnities the seller gives, the conditions that must be satisfied before completion, and the parties' rights if things change in between.
The price mechanism is where a lot of value moves. A completion accounts mechanism adjusts the price for actual cash, debt and working capital at completion; a locked box fixes the price at an earlier balance sheet date with the seller barred from extracting value after it. The two allocate risk very differently.
Warranties are statements of fact about the business. Where a warranty proves untrue the buyer has a claim, subject to limitations on time, size and disclosure, and anything disclosed in the data room is generally carved out.
Signing and completion are usually separate events, because conditions such as regulatory clearance take time. What happens in that gap, who bears the risk of deterioration and what the seller may do with the business, is heavily negotiated.
Worked example
A locked box SPA fixes the price against a 31 December balance sheet, with the seller barred from extracting value after that date and completion in April.
The alternative, completion accounts, would adjust the price for actual cash, debt and working capital at completion. The first gives price certainty at signing; the second allocates the intervening performance to the buyer.
Which mechanism is used is worth several percent of the price, which is why it is negotiated rather than assumed.