The Share Purchase Agreement (SPA): What Founders Must Know

The 30-Second Definition

The Share Purchase Agreement (SPA) is the principal legal contract that governs the sale of a business by transferring ownership of its shares from the sellers to the buyer. It is the most consequential document you will ever sign. Unlike the Letter of Intent, which is largely non-binding, the SPA is an enforceable legal instrument that defines every financial, legal, and operational obligation you are accepting - including obligations that survive for years after completion day.

What the SPA Actually Governs

Business owners often assume that once they have agreed a headline price and a payment structure in the Heads of Terms, the SPA is simply a formal record of that handshake. This is a dangerous misconception. The SPA is where the buyer's legal team encodes their maximum protection. First-time sellers are frequently shocked to discover that the document can run to 200 or more pages, and that the clauses which carry the greatest financial risk are buried deep in the schedules.

The SPA governs five critical areas that directly affect your post-completion financial position:

- Completion Mechanics: The precise conditions that must be satisfied before funds are released - including regulatory approvals, material adverse change clauses, and condition precedent sign-offs. If any condition is not met, the buyer has the right to walk away or renegotiate.

- Purchase Price Adjustments: The mathematical framework for recalculating your final payout based on the actual Locked Box or Completion Accounts balance sheet. This is where the Debt-Free, Cash-Free adjustments and the Net Working Capital Peg are formally encoded. The definitions of "Cash" and "Debt" agreed here are legally final.

- Representations and Warranties: The formal legal statements you are making about the historical accuracy of every aspect of your business - its accounts, its contracts, its people, its intellectual property, its tax position, and its legal standing. If any statement turns out to be materially inaccurate, the buyer has the right to bring a warranty claim against you personally.

- Indemnities: Unlike warranties (which require the buyer to prove loss), indemnities are pound-for-pound reimbursement obligations for specific, identified risks. A tax indemnity means that if HMRC raises an additional assessment related to your period of ownership, you pay it regardless of whether the buyer suffered a measurable commercial loss.

- Restrictive Covenants: The post-completion restrictions on your commercial freedom. A standard SPA will prohibit you from competing in your industry, soliciting your former customers, or approaching your former employees for a period of typically two to five years. These covenants are legally enforceable and can be the subject of injunctions if breached.

The Warranty Schedule: Your Largest Hidden Liability

The warranty schedule is the section of the SPA that generates the most post-completion litigation. Buyers' lawyers draft warranties as broadly as possible, and sellers' lawyers negotiate them as narrowly as possible. The key battleground clauses in a mid-market UK transaction include:

- The Accounts Warranty: A statement that your statutory and management accounts give a true and fair view of the company's financial position. If the buyer's accountants subsequently uncover that you capitalised expenses that should have been expensed, or deferred revenue that should have been recognised, this warranty is at risk.

- The Material Adverse Change (MAC) Clause: A provision allowing the buyer to withdraw from the transaction or reprice if the business suffers a significant deterioration between signing and completion. Understanding exactly what triggers a MAC in your SPA is non-negotiable.

- The Tax Covenant: A separate deed (often appended to the SPA) that gives the buyer the right to pursue you personally for any additional tax liability arising from the period of your ownership, regardless of the indemnity cap on general warranty claims.

Negotiating the SPA: Your Seller's Checklist

Your corporate lawyers must fight to limit your exposure on four fronts before you sign:

- Cap your warranty liability. General warranty claims should be capped at 20-30% of the total purchase price. Resist any attempt to set the cap at 100% of enterprise value.

- Enforce the Limitation Period. Warranty claims must be notified within a fixed period - push for 18 months for general warranties and 7 years for tax covenants, aligned with HMRC's standard enquiry window.

- Qualify every warranty with knowledge. Ensure warranties are drafted as "to the best of the seller's knowledge and belief" rather than as absolute statements. This prevents a buyer from making a warranty claim for a historical issue you genuinely did not know existed.

- Use Disclosure Schedules aggressively. Every known exception to every warranty must be formally disclosed in the Disclosure Letter before signing. What is fairly disclosed cannot later become the basis for a warranty claim.