The definitive purchase agreement is the legally binding contract that sets out the terms of an acquisition. Its exact name depends on the structure: a share/stock purchase agreement (SPA) for an equity deal, an asset purchase agreement (APA) for an asset deal, or a merger agreement for a statutory merger. It is negotiated after due diligence and supersedes the non-binding letter of intent.
Principal provisions
- Purchase price and adjustments — the headline price plus mechanisms such as a working-capital adjustment and any earnout (contingent payments).
- Representations and warranties — statements of fact by each party (about the business, financials, contracts, litigation, compliance). If untrue, they can trigger indemnity claims.
- Covenants — promises about conduct, especially how the target is run between signing and closing (operating in the ordinary course; not taking major actions without consent).
- Conditions to closing — what must be true to complete: regulatory approvals, shareholder votes, accuracy of representations, no material adverse change.
- Indemnification — who compensates whom, and how much, for breaches; often supported by an escrow holdback or representations-and-warranties insurance.
- Termination rights — when either party may walk away, and any break fee payable.
Material adverse change (MAC/MAE)
A material adverse change (or material adverse effect) clause lets a buyer refuse to close if the target suffers a serious deterioration between signing and closing. MAC clauses are heavily negotiated and, in litigation, courts have set a high bar for invoking them, generally requiring a durationally significant, company-specific impact rather than a short-term or industry-wide downturn.
Signing and closing
In many deals signing and closing are separated by weeks or months while conditions (especially antitrust clearance) are satisfied. The agreement governs both moments and the gap between them.
See also
- Letter of intent — A preliminary document outlining the main terms of a proposed deal, mostly non-binding.
- Due diligence — The structured investigation a buyer conducts on a target between LOI and closing — covering financial, legal, tax, commercial, operational, IT, HR and environmental workstreams — to verify the seller’s claims, find risks and shape final price and deal terms.
- Deal structure — How an acquisition is legally and economically assembled — chiefly the choice between an asset purchase and a stock purchase, and the tax, liability and consent consequences that flow from it.
- Earnout — Deferred, contingent payments tied to the target’s post-close performance, used to bridge buyer–seller valuation gaps but a frequent source of post-closing dispute.
- Antitrust and merger control — Government review of mergers to prevent harm to competition.
External resources
Practitioner guides from Main Street Wealth, the M&A advisory firm that sponsors M&Apedia (how this works):
- Complete M&A Process Timeline — Stage-by-stage walkthrough of a transaction from preparation to closing.