M&A Purchase Agreement Review Guide
An M&A purchase agreement is the longest, most consequential contract most founders ever sign. Lawyers are paid by the hour to fight over its every word; the founder is paid once. Ten clauses determine whether the headline price actually lands in your bank account.
What it is
An M&A (mergers and acquisitions) purchase agreement is the binding contract for the sale of a company. The two main forms: stock purchase agreements (SPA), where the buyer acquires the company's stock; and asset purchase agreements (APA), where the buyer acquires specific assets and liabilities. Mergers (where the target merges into the buyer or a sub) use merger agreements with similar substance.
Typical agreements run 60-150 pages plus disclosure schedules that can extend to thousands. The text reads dense and legalistic; the economic substance is concentrated in maybe 10 sections.
The seller's job is to push back on protections that bleed price out of the deal: broad reps and warranties, large escrows, low caps, asymmetric MAC clauses, broad indemnities. The buyer's job is the inverse. The dance between them produces the final purchase price net of risk allocation.
Common clauses to check
- [ 01 ]
Purchase price & payment structure
How much, in what form, paid when. Cash, stock, earnout, escrow holdback, working capital adjustment all change the headline.
What to look for- Cash vs. stock breakdown.
- Working capital adjustment formula and target.
- Escrow holdback amount, term, and release schedule.
- Earnout structure and milestones (if any).
- Form of consideration restrictions (registration rights, lockup periods).
Red flags- Ambiguous working capital target.
- Earnout milestones controllable by buyer.
- Escrow over 15% of price for more than 18-24 months.
- Stock with extensive lockups but no registration rights.
- [ 02 ]
Reps & warranties (R&W)
Seller's statements about the business — financials, operations, IP, litigation, employees, taxes, etc. The longer the list, the more exposure.
What to look for- Knowledge qualifiers ("to seller's knowledge") for forward-looking or hard-to-verify reps.
- Materiality qualifiers throughout.
- Disclosure schedule carve-outs for known issues.
- Bring-down at closing — reps must be true at closing too.
- R&W insurance — increasingly standard, shifts risk from seller to insurer.
Red flags- Absolute reps without knowledge or materiality qualifiers.
- Bring-down standard requiring reps to be true "in all respects" rather than "in all material respects."
- Buyer's right to walk on de minimis breaches.
- [ 03 ]
Indemnification
Seller's promise to make the buyer whole for breaches, undisclosed liabilities, or specific risks (taxes, environmental, etc.). The economic settlement of the reps.
What to look for- Cap on seller's indemnification (typically 10-15% of purchase price).
- Deductible/basket — minor breaches don't trigger indemnification.
- Survival period — typically 12-24 months for general reps.
- Carve-outs from cap and survival for fundamental reps (ownership, authority) and fraud.
- Sole and exclusive remedy provision (limits buyer's claims to indemnification).
Red flags- Uncapped indemnification on broad categories.
- Multi-year survival on operational reps (signal that buyer doesn't trust the business).
- Buyer's right to set off against earnouts or escrow.
- No deductible — every minor mistake is a claim.
- [ 04 ]
Escrow & holdback
Cash held back from purchase price to cover indemnification claims. Sized to expected risk.
What to look for- Escrow amount (typically 10-15% of price) and release schedule.
- Single escrow agent (third party) holding funds.
- Separate special escrows for known risks (litigation, tax).
- Rights to interest on escrow funds.
Red flags- Escrow over 20% for routine deals.
- Holdback retained by buyer (not third party) — buyer becomes judge of claims.
- No automatic release of escrow on the survival expiration date.
- Indefinite escrow for "pending claims" with vague trigger.
- [ 05 ]
MAC clause (Material Adverse Change)
Buyer's right to walk if something materially bad happens between signing and closing. Famous in litigation; structurally adverse to seller.
What to look for- Definition limited to changes that "materially adversely affect" the business.
- Specific carve-outs — industry-wide changes, war/pandemic, regulatory changes — that don't trigger MAC.
- Disproportionate-impact qualifier — carve-outs only protect against "general" changes; if they hit the target disproportionately, MAC may apply.
- Time window for MAC (typically signing to closing).
Red flags- Vague MAC definition giving buyer wide latitude to walk.
- Carve-outs that swallow the rule.
- MAC tied to forward-looking projections rather than past performance.
- [ 06 ]
Closing conditions
What must be true for the deal to close. The buyer's exit ramp.
What to look for- Specific list of closing conditions (regulatory approvals, financing, etc.).
- Reasonable best-efforts obligations for both parties.
- Outside date (drop-dead date) — when either party can walk.
- Termination fees / break fees for failure to close.
Red flags- Closing condition "in buyer's reasonable judgment" or sole discretion.
- Vague conditions buyer can claim aren't satisfied.
- No financing-out — buyer obligated to close even if financing falls through (great for seller, often unavailable in PE deals).
- [ 07 ]
Working capital adjustment
Post-closing true-up to ensure the company is delivered with normal operating capital. Can shift millions.
What to look for- Specific working capital target (often historical average).
- Detailed accounting principles for the adjustment.
- Adjustment cap or no cap.
- Dispute resolution mechanism (independent accountant).
Red flags- Working capital target set at unattainable level.
- Buyer's sole discretion on accounting principles.
- Working capital deficit charged with interest or penalties.
- [ 08 ]
Non-compete & non-solicit
Seller's post-closing restrictions on competing with the business. Standard but sized differently across deals.
What to look for- Geographic scope and duration (3-5 years post-closing is common).
- Field of activity definition.
- Carve-outs for passive investments (under 5%).
- Non-solicit of employees and customers.
Red flags- Worldwide non-competes for businesses with limited geographic footprint.
- 10-year non-competes — uncommon and aggressive.
- Non-solicits covering employees who never worked with seller.
- [ 09 ]
Earnouts
Contingent purchase price tied to future performance. The purest fight in M&A: who controls the outcome.
What to look for- Specific milestones — measurable, time-bound, controllable.
- Buyer's covenants to operate the business in good faith.
- Anti-dilution protections against buyer's actions that suppress earnout.
- Acceleration on change of control.
- Dispute resolution mechanism.
Red flags- Earnouts based on metrics buyer controls (R&D priorities, marketing spend, pricing).
- Buyer's right to integrate the business in ways that distort earnout metrics.
- Long earnout periods (5+ years) — too much can change.
- No carry-forward for unmet milestones (binary thresholds, no partial credit).
- [ 10 ]
Tax matters & Section 338 election
Tax treatment of the transaction. Stock vs. asset deals have very different tax consequences for both sides.
What to look for- 338(h)(10) election availability and economic split (asset-deal tax treatment with stock-deal mechanics).
- Allocation of purchase price across asset categories.
- Pre-closing tax indemnification.
- Cooperation on audits.
Red flags- Buyer requires 338 election without economic compensation (huge tax cost for seller).
- Tax indemnification with no cap or survival.
- Vague allocation provisions creating dispute risk.
Other watchouts
- Seller financing — note terms, security, subordination.
- Transition services agreements (TSA) — IT, HR, legal services post-close.
- Employee retention bonuses or stay-and-perform packages.
- Disclosure schedules — the meat of the negotiation; review every line.
- Public announcement timing and content.
- Confidentiality of deal terms.
- R&W insurance — increasingly standard; shifts risk from seller to insurer for a premium.
- Specific performance — buyer's right to force closing rather than accept damages.
- Antitrust filings (HSR) and timing.
- Shareholder approval requirements for both sides.
Frequently asked questions
- What's the difference between a stock and asset purchase agreement?
- In a stock purchase, the buyer acquires the seller's company shares — getting the entire entity, including all liabilities. In an asset purchase, the buyer cherry-picks specific assets and assumes only specified liabilities. Asset deals are often more favorable for buyers (less liability) and tax-efficient (step-up in basis); stock deals are simpler operationally but expose buyer to all historical liabilities.
- What is a representation and warranty in M&A?
- A statement of fact made by the seller about the business — financial statements are accurate, taxes are paid, no undisclosed litigation, IP is owned, etc. Reps come with consequences: if false, buyer can claim indemnification. "Reps & warranties" are negotiated heavily because every word affects post-closing risk allocation.
- What is R&W insurance?
- Representations and Warranties insurance — a policy that backs up the seller's reps. Buyer pays the premium (typically 2-4% of policy limit), seller's escrow drops to a small "retention" (usually 0.5-1.5% of price). Has become standard in mid-market and larger deals, replacing seller indemnification with insurance recovery.
- How big should an escrow be in M&A?
- Historical norm was 10-15% of purchase price for 12-24 months. With R&W insurance now standard, escrows have shrunk to 0.5-1.5% retention amounts. The size depends on perceived risk, deal size, seller credit quality, and whether R&W insurance is in play.
- Should I structure my deal with an earnout?
- Earnouts can bridge valuation gaps when buyer and seller disagree on future performance. They also create post-closing fights — the seller depends on metrics the buyer now controls. If the business is stable and the seller is leaving, fixed-price deals are cleaner. If the seller stays involved, earnouts can align incentives but require careful drafting of buyer's operational covenants.
Run this checklist on your actual contract
Upload the PDF. We’ll flag every clause from this guide that matters in yours, in plain English.
Read your contract