Why the SPA Matters for Entrepreneurs
For an entrepreneur, the SPA isn’t just another piece of paper. It’s the backbone of the transaction—governing how the purchase price is set, what representations are made about the business, and how you mitigate uncertainty after the deal closes. Your SPA can impact your leverage with investors, the trust of your new partners, and even your post-deal legacy. It’s your first step in a new chapter for your business, and ensuring it accurately reflects your interests will pay dividends long after the ink dries.
The Building Blocks of the SPA
Most SPAs follow a standard structure, which includes:
- Preamble and Parties: The SPA will open by identifying the parties: you (as the seller or buyer), the target company, and all relevant players. Clarity on who’s signing—and in what capacity—is crucial.
- Recitals: These preliminary statements outline the “why” of the transaction, providing helpful context for the agreement and clarifying important background details.
- Definitions: Defined terms help wrangle complexity. For instance, the definition of “Material Adverse Effect” or “Knowledge” can seem like lawyerly minutiae, but in practice they shape how risk shifts between parties. Understanding and negotiating these definitions is critical.
Purchase and Sale: What Exactly Is Changing Hands
The heart of the SPA states that the seller will transfer the shares of the target company to the buyer. This might seem straightforward, but it raises several questions:
- Consideration: Are you receiving cash, stock in the acquiring entity, a note, or some combination? The structure can affect your tax position, future upside, and overall value extraction.
- Allocation Among Sellers: If multiple sellers exist, how is the purchase price split? This allocation can be politically sensitive and affect overall satisfaction with the deal.
Adjusting the Price: Purchase Price Adjustments and Earn-Outs
To ensure the buyer gets what they pay for, many SPAs include post-closing price adjustments. For example, if the target’s working capital isn’t what the buyer expected at closing, the price might adjust afterward. From an entrepreneur’s perspective, a key point is transparency and predictability. You’ll want procedures for handling disputes and carefully defined calculation methods.
Earn-Outs: An earn-out ties part of the purchase price to the future performance of the business. While it can bridge valuation gaps, it also invites disputes if the metrics aren’t crystal clear. As a seller, push for objective, measurable milestones and ensure you have some oversight or input if decisions post-closing affect earn-out triggers.
Securing Obligations: Escrows and Holdbacks
Buyers often request that a portion of the purchase price be placed in escrow to cover potential post-closing adjustments or indemnification claims. This is typical and can be seen as “insurance” for the buyer. As an entrepreneur, focus on:
- Ensuring the escrow amount and duration are fair and market-based.
- Clearly defining the circumstances under which funds may be released or withheld.
Closing Mechanics: Timing, Location, and Logistics
The SPA specifies how and when the deal moves from signing to closing. If certain conditions need to be met first—regulatory approvals, third-party consents, financing—build flexibility into the timeline. Entrepreneurs should confirm that all required steps are realistic and that no hidden landmines could delay or derail the closing.
Representations and Warranties: What You’re Promising
Representations and warranties are detailed promises about the state of the business. They help the buyer understand what they’re getting and allocate the risk of hidden problems. From an entrepreneur’s standpoint, the representations and warranties can be the most time-consuming section:
- Depth and Breadth: Is the buyer asking for sweeping promises or narrow, focused assurances? Too-broad representations can create unnecessary exposure.
- Materiality and Knowledge Qualifiers: These qualifiers ensure you’re not guaranteeing absolute perfection. For example, stating “to the best of seller’s knowledge” about pending litigation is more favorable than an unqualified statement.
- Disclosure Schedules: These are attachments listing exceptions to your reps and warranties. They must be carefully prepared and honest. Thorough schedules can prevent post-closing conflicts and indemnification claims.
Buyer’s Representations and Warranties: Ensuring They Can Close
While the buyer’s reps are often shorter and less onerous, they still matter. You want assurances that the buyer can actually pay and isn’t restricted by laws or agreements. If the buyer’s consideration includes stock, you’ll expect more robust promises about their financial health and compliance.
Conditions to Closing: Before the Deal Is Done
Most SPAs include conditions that must be met before closing. For example, maybe you need regulatory approval, or the buyer needs certain third-party consents. These conditions protect both sides. Consider whether they’re realistic and what remedies you have if conditions aren’t met on time.
Covenants: Conducting Business Pre- and Post-Closing
Covenants dictate how the target company operates between signing and closing, and sometimes beyond. Pre-closing, the buyer might insist you run the business “in the ordinary course.” Post-closing, you might be bound by non-competes or non-solicits. Entrepreneurs should negotiate realistic operational requirements and understand any long-term obligations.
Termination: When the Deal Falls Through
Sometimes deals don’t close. The SPA will spell out termination rights: who can walk away, under what conditions, and what happens if one party fails to perform. If termination fees or break-up fees apply, ensure they’re balanced and reflect the true costs of a failed deal.
Indemnification: Dealing with Surprises After Closing
Even after careful diligence, issues can arise post-closing. Indemnification provisions allocate the risk of these unexpected problems. From an entrepreneur’s perspective:
- Caps, Baskets, and Thresholds: Negotiate limits on your exposure. For example, a basket might require the buyer’s total claims to exceed a certain amount before you pay out.
- Survival Periods: Your reps don’t live forever. Shorter survival periods limit how long the buyer can claim indemnification.
Balancing these protections is crucial. Too few protections might invite frivolous claims, while too many might leave you excessively exposed.
Miscellaneous Provisions: The Boilerplate that Matters
The SPA wraps up with “boilerplate” clauses on governing law, assignment, dispute resolution, and more. They may seem routine, but they can shape your rights if conflicts arise. For instance, a carefully chosen dispute resolution mechanism—arbitration versus litigation—can streamline conflicts and save money.
Crafting a Winning Strategy
As an entrepreneur, your best tools in an SPA negotiation are preparation, clarity, and an understanding of what’s standard in your market. Work closely with experienced advisors who can translate legalese into practical business terms. Tailor the SPA to reflect your company’s unique circumstances while keeping an eye on what matters most: protecting your value, minimizing unnecessary risk, and ensuring a smooth path into your business’s future.
Remember, the SPA is not just a legal document—it’s a roadmap for how you and your business partners handle value, risk, and relationships going forward. By mastering its fundamentals and negotiating wisely, you’ll move from uncertainty to confidence, ready to seize the opportunities on the other side of the closing table.
