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What is a Sales & Purchase Agreement (SPA)?

Welcome to the first video in our second series of M&A Deconstructed. In this video series II we do a deep dive into a Sales & Purchase Agreement (SPA).

The SPA is an important and binding legal document. It governs the relationship between buyer and seller. We look in more detail at what it covers including: consideration, restrictive covenants, operative provisions, price adjustment mechanisms and the difference to an APA.

This video is part of a series that aims to explain mergers and acquisitions (M&A) to business owners without prior company sale experience. Our intention is to debunk the terminology and to demystify the process.

Watch the video below for the in-depth discussion.

Quick Find Timeline:

00:07 – Introducing ‘What is a Sales & Purchase Agreement (SPA)?’
00:34 – What is a Sales & Purchase Agreement (SPA)
01:09 – Overview of content for a Sales & Purchase Agreement (SPA)
02:03 – What needs to be covered in an SPA – Price, payment, adjustments, verification, warranties, indemnities
02:59 – Covenants, schedules, premises, IP, IT, ancillary documents
04:04 – Breaking down the overwhelming document into bite sized pieces
04:17 – A binding legal document
04:46 – Expectation of length of SPA
05:00 – Why some SPA’s are longer than others
05:58 – Interpretation of the technical language by a lawyer
06:18 – Why do you require a specialist lawyer?
08:12 – Heads of terms and the SPA
08:39 – Avoiding reentering a negotiation during an SPA
10:15 – The difference between an SPA and an APA

Series 2: Topics

The conversations in the second more technical series of videos include:

  1. What is a Sales & Purchase Agreement (SPA)?
  2. M&A Warranties, Representations & Indemnities
  3. Getting Paid: Earn-Outs, Deferred Payments & Vendor Loans
  4. What could Derail a Company Sale? Learn how to avoid the main pitfalls
  5. How much does it Cost to Sell a Company?
  6. 5 Insider Tips: A Successful Company Sale

In case you missed our first series you can watch the videos on catch up below:

  1. Introduction to the M&A Deconstructed series of videos
  2. What is EBITDA?
  3. What are Heads of Terms?
  4. Equity Share vs Asset Sale
  5. Completion Accounts vs Locked Box
  6. What is Due Diligence?

Meet your M&A experts

Nick Davies, Partner | M&A Solicitor, Steele Raymond LLP Solicitors
Nick acts for a wide range of business clients across various sectors, advising on complex corporate transactions including company sales, purchases and mergers. Nick also advises on on mergers, de-mergers and re-organisation.

Justin Levine – Managing Director, The NonExec Limited M&A Boutique
Justin leads a boutique exit advisory firm specialising in manufacturing, technology, IT, digital, healthcare, wholesale and distribution markets. With the support of a 15-strong virtual team of analysts and researchers, he helps private business owners with growth and exit strategies.


Steele Raymond LLP
Richmond Point, 43 Richmond Hill, Bournemouth, BH2 6LR

TheNonExec Limited
Contact us here to chat about your business exit.

Transcript for M&A Deconstructed

Transcript for video: What is a Sales & Purchase Agreement (SPA)?

Nick Davies (00:07):
Morning, Justin.

Introducing What is a Sales & Purchase Agreement (SPA)?

Justin Levine (00:07):
Yes, Morning Nick, so welcome back to our M&A Deconstructed series where we are aiming; our goal is to try and demystify the sale process of selling a company. So, we’ve already done a handful of videos where we’ve touched on the base elements of selling a company, and now we’re going to get into some of the technical stuff. Today we’re going to be talking about the Sale and Purchase Agreement.

Nick Davies (00:34):
Okay. The SPA. Yes.

What is a Sales & Purchase Agreement (SPA)

Justin Levine (00:34):
The SPA. So, just as a quick recap: The seller, and [in this example] we’re talking to people who are selling a company, a business.

Nick Davies (00:39):

Justin Levine (00:41):
If they have negotiated a deal with a potential buyer, there’s going to be a part of the process where they have brought the legal team into the process.

Nick Davies (00:51):

Justin Levine (00:52):
And that will be of course, Steele Raymond.

Nick Davies (00:54):
Fingers crossed.

Justin Levine (00:55):
And your good self.

Nick Davies (00:56):

Justin Levine (00:56):
So, of course, the notion that there is a Sale and Purchase Agreement for many company owners, they’re simply not going to be aware… It’s unlikely, they’re going to be aware of what that document is.

Nick Davies (01:08):
Yes, sure.

Overview of Sales & Purchase Agreement (SPA) Content

Justin Levine (01:09):
What it contains. So perhaps you just give us a quick overview. What is a Sale and Purchase Agreement?

Nick Davies (01:15):
Yes, sure. So, that sort of document is typically referred to as an SPA, as you say, it’s a Share Sale and Purchase Agreement. The point at which that document comes into circulation in a sales process is beyond the point where the parties, the buyer and the seller, believe they’ve agreed a deal. We’ve talked previously about heads of terms, and the heads of terms should capture some of, not everything, but some of what is going to be in the Share Sale and Purchase Agreement. For someone who hasn’t been through an M&A transaction before it can be a daunting document, it can be quite a long document. There is a lot of content. The document should really set out all of the terms that the parties agree to on the basis, which they agree to buy and sell the shares in the company.

What needs to be covered in an SPA – price, payment, adjustments, verification, warranties, indemnities

Nick Davies (02:03):
So fundamentally you need to get the parties in there. You need to know who the buyer and the seller are. You need to identify them correctly. You need to set out what the price is going to be, how the price is going to be paid. You may have all cash on completion. You may have some deferred consideration. You may have different forms of consideration, such as loan notes, consideration shares. There may also be a mechanism for adjustment of the price. And that’s fairly common where a buyer says, well, I’m buying your company, assuming certain levels of cash or debt. And then you have an exercise after completion where you come back and just verify those numbers, that’s called completion accounts. That might be something we talk about separately. So the SPA will contain that mechanism for adjusting the price. And the SPA will also contain detail about warranties, indemnities to cover areas of risk which a buyer has identified.

Covenants, schedules, premises, IP, IT, ancillary documents

Nick Davies (02:59):
There will be things such as restrictive covenants, which say that the seller can’t go off and compete with the company after completion. And there’ll be a variety of schedules. So if the company operates from a premises or owns a premises, or has a lease hold premises, details will be set out. There will be schedules of warranties, which I know we’re going to talk about separately. There will be schedules about things like what IP or intellectual property does the company have, what are its IT systems. What are the completion deliverables? And those are all of the sort of what we call ancillary documents; resignations of directors, appointment of directors, change of registered office address, production on completion of the share certificates, banking, mandates, credit cards, keys, company documents, et cetera. So there’s a lot of content in there. And to someone who hasn’t seen that sort of document before, it can be a little bit overwhelming. I think that the key is to break it down into parts.

Breaking down the overwhelming document into bite sized pieces

Nick Davies (04:04):
Look at the front end. What are the operative provisions? Deal with those. Separately, look at the schedules, look at the warranties and deal with those. So that’s a summary of what a typical SPA might include.

A Binding Legal Document

Justin Levine (04:17):
Yes. I think it’s the way I look at it, explain it to clients. It’s the legal document, that is the binding legal document.

Nick Davies (04:24):

Nick Davies (04:25):
It governs the relationship between the parties in respect to that sale.

Justin Levine (04:30):

Nick Davies (04:31):
If there’s a question after completion about, well, should A or B have done this or that, the document you’re going to go back and refer to is the SPA.

Justin Levine (04:39):
That’s right.

Justin Levine (04:40):
I think what’s surprises me when I speak to my clients as they come to this process. Upstream of that, three months or so,

Nick Davies (04:46):

Expectation of Length of SPA

Justin Levine (04:46):
I explain the Sale and Purchase Agreement is a detailed document. It’s often quite lengthy. I don’t know what the longest document you’ve ever seen, but I’m seeing 30 to, up to a hundred pages sometimes.

Why some SPA’s are Longer than Others

Nick Davies (05:00):
Yes, definitely. It can depend on deal value. It doesn’t have to depend on deal value, but if a buyer is spending more money, they may want more protection and more detail. So certainly we see SPAs on very large transactions, 120, 140 pages. Really for smaller transactions beneath 10 million pounds, you shouldn’t be getting up to that level, in my view. You should be seeing things which are 60 or 70 pages, or maybe less. But again, if a particular company has, let’s take, for example, a multi-channel retail business, high street retail, travel agent perhaps. If you are buying a company of that type, and let’s say, it’s got 60 properties, you might have one page summary of each property in the SPA. It may be dealt with separately, but if it’s in the SPA, so there are different factors in each deal, which can influence and dictate the length of the SPA. So it’s a bit of, how long is a piece of string, really?

Interpretation of Technical Language by a Lawyer

Justin Levine (05:58):
Yes. And I think that from my side having done quite a number of projects, every time I come to an SPA and reread it, despite a reasonable level of commercial knowledge, I still look at it and it requires a lawyer to interpret a large body of it.

Nick Davies (06:17):

Why Do You Require a Specialist Lawyer?

Justin Levine (06:18):
And that’s having done 10 years or more of transactions. It requires specialists. And I think that’s one of the things that I guide my clients to do. There’s a fundamental difference between a solicitor that’s dealing with perhaps conveyancing, for example, on commercial property and a corporate lawyer that is dealing with M&A transactions.

Nick Davies (06:39):

Justin Levine (06:39):
And, I don’t know how you feel about it. But my viewpoint having that experience is saying always hire a specialist in that field to deal with that point, the SPA.

Nick Davies (06:49):
Yes. I think that’s right. I think you want somebody who has seen it before, who has done it before, who is part of a wide and broad team who have also seen it before and done it before, because you get the benefit of that experience. Some SPAs are very simple and small transactions, probably somebody with a decent level of commercial knowledge can work their way through the vast majority of it. I think that as the deals get more complex, particularly around different forms of consideration. We’ve seen rolled over consideration shares where the shares are actually interest issued in an American LLP. You see loan notes, which are subordinated to senior debt. You can see earn outs, which are quite often very complex because there are requirements as to how the business should be run, then their requirements as to how the business is measured in terms of its performance.

Nick Davies (07:42):
And then you have to run all of that through a formula to work out what the earn out consideration is. So earn outs can become quite complicated. I think get the best advice. Most people are going to do this once. And I think that you don’t want what we call sellers’ remorse. Where you’ve gone through the process and think, well, yes, we’ve got through it. Phew that’s a relief that you look back and think, well, wonder if we could have done that better. I think do it properly, do it once and get the best result you can get.

Heads of Terms and the SPA

Justin Levine (08:12):
In my view, it’s partly about getting the experienced guide. If you like, I’ll use that as a term for, it could be the corporate finance lead, the lawyer. When you’re talking about the SPA being 50 to 150 pages, for example. From my viewpoint, getting the essence of the deal, the basic foundations of the deal agreed at heads of terms.

Nick Davies (08:32):

Justin Levine (08:32):
Is really important. It’s often a balance as to how much you put in the heads.

Nick Davies (08:38):

Try and Avoid Reentering a Negotiation during an SPA

Justin Levine (08:39):
That reflects what might go into the SPA. But the worst, I won’t call it a worst case scenario, for example, but getting to the SPA and then reentering a negotiation.

Nick Davies (08:49):

Justin Levine (08:49):
Or its fundamentals, the foundations of the deal is always dangerous territory in my view.

Nick Davies (08:53):
You don’t want to be there. I think I’ve used the phrase in the previous video on heads of terms. You want enough detail to understand what the deal is, but don’t do the deal in the heads. Otherwise you’re going to end up spending 1, 2, 3 months negotiating heads of terms that doesn’t help anybody. You’ve got to capture the key points and then you’ve got to move on. You do want, when you are negotiating the SPA, to be able to refer back to a substantive set of heads of terms, which capture all the key commercial points. So that, as you say, you’re not then renegotiating the deal again later. There will be things that come up on the SPA which are not captured in the heads. That’s par for the course. You are not going to, for example, specify the exact warranty language in the heads of terms. You’re just not going to be able to do that.

Nick Davies (09:39):
So there will be some negotiation in the SPA, but you should not be coming back at the SPA stage to reviewing the price unless something’s come up in due diligence. You should have established your warranty de minimis threshold. You should have established your covenant length. You should have established if anyone’s having any new employment or consultancy. These are the things you should capture and which make drafting the SPA easier and mean that the legal teams have to spend less time. Less time means less cost. Most clients are interested in that. So get the heads right, makes the SPA easier.

Justin Levine (10:12):
What is the difference? We’ve talked about an SPA.

Nick Davies (10:15):

The Difference Between an SPA and an APA

Justin Levine (10:15):
What’s the difference between an SPA and an APA (an Asset Purchase Agreement)?

Nick Davies (10:20):
Yes, sure. So in an SPA (Share Sale and Purchase Agreement), someone is buying, someone is selling shares in a limited company. If we’re talking about an Asset Purchase Agreement, it could be that a group of individuals or an individual or a company are selling the business and assets, (the trade), outside of a limited company shell to the buyer, and the buyer could be using a limited company for that purchase. So it’s a similar form of agreement in terms of what’s covered. When you are buying assets, you are not buying things like accounting and tax history. You are taking on employees, you are taking on contracts, you are taking on the business; the goodwill, the brand, the name. So there are different things covered, but fundamentally, the documents are designed to do the same thing. They are there to help transition the ownership of, in the SPAs case shares, and in the APAs case, the business and the assets from a seller to a buyer.

Justin Levine (11:19):
Understood. No, that’s fine. Thank you. I think one aspect, which we will cover in a separate video.

Nick Davies (11:23):

Justin Levine (11:24):
And it’s an important part of the SPA and that are the representations.

Nick Davies (11:26):

Justin Levine (11:26):
The warranties.

Nick Davies (11:26):

Justin Levine (11:26):

Nick Davies (11:27):

Justin Levine (11:33):
And of course the very famous disclosure letter.

Nick Davies (11:35):

Justin Levine (11:35):
And those make up parts of the SPA, but they’re extremely important for the seller, but I think we’ll cover that in a separate video. So, I think for the time being, I think we’ve covered off the SPA and the APA, and given a nice cover for that. Thank you.

Nick Davies (11:49):
Sounds good. Look forward to discussing warranties and reps. Thanks Justin.

Justin Levine (11:52):
Thanks Nick.

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