The Perfect M&A Purchase Agreement

M&A purchase agreements reflect months of due diligence and distill hours of complex negotiations into a legally binding commitment between buyer and seller. They’re the capstone of the deal edifice, resting on a foundation of two other documents—the CIM and LOI.

Read on to learn how to create the perfect M&A purchase agreement. (Note: Kuhn Capital is not a law firm, and this article does not constitute legal advice.)

To define PAs more practically, buyers and sellers use them to set out the terms under which they consummate an M&A transaction. Perfect PAs smooth the transition between the seller and the acquirer by precisely specifying each party’s rights and obligations. The perfect PA strives to meet a tall order: eliminate ambiguity and anticipate every circumstance that could lead to post-close disputes.

What Topics Do They Cover?

Below are the eight sections found in nearly all mid-market PAs. The exception is smaller deals where the principals may omit the last section describing when either party may unwind a badly flawed deal. So, even though the details of a perfect PA can vary widely based on target complexity, industry, ownership structure, location, etc., all have the following seven sections that cover—

1. The kind of transaction being closed
2. How much and in what forms the buyer will pay the seller
3. Statements of fact about the buyer and seller’s business and guarantees about those facts
4. How an injured party is made whole if such statements and guarantees prove to be false
5. Covenants or promises to accomplish certain tasks or to honor certain provisions before or after the close
6. What conditions must be in place before the deal can close
7. How, where and when to raise and resolve disputes

Purchase Agreement Sections

1. Type of Transaction

Section Content: Defines the basic structure of the deal, specifying whether it’s an asset sale, stock sale or merger. In mid-market deals, asset or stock sales are far more common than mergers. For a primer on the differences between these types of sale transactions and associated M&a terminology, see “Entrepreneur’s Guide to M&A and Fund-Raising Terms.”

Importance: High
Potential for Disagreement: Moderate

Some General Solutions: Sellers don’t like asset sales because the proceeds are taxed as ordinary income. Instead, they prefer to sell stock taxed at lower long-term capital gains rates. But buyers prefer to acquire assets because they can depreciate them, thereby lowering profits and, in turn, taxes. They can also avoid responsibility for undisclosed liabilities associated with the company’s equity ownership.

In general, a solution lies in compromise. If one party strongly prefers a certain type of sale, reward the other party by figuring out ways to compensate it for conceding. In an asset sale, avoid disputes by clearly defining which assets and liabilities are included by listing them in the PA’s appendix. Similarly, for stock sales, specify the exact number and type of shares being transferred.

A Sample Conflict’s Resolution: During a recent M&A negotiation, the buyer of a software company we represented proposed to purchase its assets, leaving certain liabilities behind. But the client wanted to sell stock, thereby qualifying for the lower long-term capital gains tax rate. They ultimately agreed on a hybrid structure in which the buyer purchased certain assets at a lower price than before, the seller retained certain liabilities, and the buyer then acquired the stock of the remaining business at a higher price. In a way, they split the difference.

2. Purchase Price and Consideration

Section Content: Describes the amount and form of payment for the transaction, which may include cash, stock, assumption of liabilities, an earnout, or some combination of the above.

Importance: Very High
Potential for Disagreement: High

Some General Solutions:

• Develop a precise payment structure description.
• Create a mechanical formula for post-close purchase price adjustments based on the seller’s amount of working capital or other financial metrics.
• Beware of earnout complexity—the further down the income statement you place earnout drivers, the higher the probability of earnout manipulation and unhappy sellers. For a definitive yet mercifully brief exploration of earnouts and their uses, see Earnouts: The Owner’s Guide.
•  Create dispute resolution procedures (see below).

A Sample Conflict’s Resolution: During PA negotiations over the sale of our client in the AI consulting business, the buyer balked at the seller’s rapidly growing EBITDA projection. To bridge the resulting valuation gap, we structured an earnout based on gross margin targets achieved during the two years post-close. The earnout described detailed calculation methods, dispute-resolution procedures, and a provision for accelerated payment if the buyer exited during the covered period.

3. Representations and Warranties

Section Content: The distinction between a rep and a warranty can be subtle. Parties making reps assert that certain circumstances are true at the time of close. Example: “We patented Aardvark’s source code.” In contrast, parties issuing warranties guarantee that specific agreements or circumstances described within the PA will be honored going forward. Example: “Aardvark warrants that it will retain the clients listed in Appendix E for at least one year.”

Importance: Very High
Potential for Disagreement: High

Some General Solutions:

• Use disclosure schedules to provide detailed information about exceptions to representations.
• Negotiate the scope, especially the duration, of reps and warranties.
• Include “materiality” and “knowledge” qualifiers to limit the seller’s liability exposure.

A Sample Conflict’s Resolution: After our healthcare services client signed the PA, the buyer uncovered potential regulatory compliance issues. To tackle this problem, we worked to: 1) Extend the PA’s survival period for healthcare compliance reps and warranties to five years (versus the 2 years in place for other reps), and 2) Assign a higher indemnity cap to these compliance issues.

4. Indemnification

Section Content: Describes how the parties (mostly the buyer) will be compensated if the representations and warranties prove to be inaccurate or if a party breaches the agreement.

Importance: High
Potential for Disagreement: High

Some General Solutions:

• Set specific indemnification caps and baskets.
• Define survival periods for each different type of rep and warranty.
• Use escrow accounts or holdbacks to secure indemnification obligations

A Sample Conflict’s Resolution: In purchase agreement negotiations, the buyer of our client’s tech business insisted on an indemnification limit or “cap” of 50% of the purchase price. We countered with 10%, which the buyer refused. We proposed a tiered approach: a 15% cap on general representations, a 30% cap on fundamental representations, and no cap on fraud or intentional misrepresentation. They agreed and accepted a 0.5% deductible of the purchase price before any indemnification claims were paid.

5. Covenants

Section Content: Covenants are promises made by the parties that govern their conduct before and after the close.

Importance: High
Potential for Disagreement: Moderate

Some Common Solutions:

• Clearly define the seller’s obligations to operate the business in the ordinary course before closing. Quantify what seller actions would stray out of the “ordinary course” regarding third-party contracts, loans, investments, etc., e.g., an expenditure greater than $75,000.
• Negotiate reasonable non-compete and non-solicitation provisions. Consult an attorney to determine how to structure these agreements, as applicable laws vary by state. Sometimes, they’re prohibited altogether, as in California.
• Often overlooked in the rush to close are detailed provisions for employee transitions and key contracts. Don’t do that.
• Some contracts with a seller’s clients may require the clients to agree to a change of control. Before a seller goes to market, it should attempt to eliminate these contractual provisions by offering clients incentives to cooperate. Example: extend current pricing for three years.

A Sample Conflict’s Resolution: In the sale of our online retailer client, the parties disagreed about the scope of the selling CEO’s non-compete clause. The buyer wanted a broad, five-year restriction, while the seller sought a narrow, two-year one. They compromised with a three-year non-compete that prohibited the CEO from affiliating with certain product categories currently sold by the buyer.

6. Closing Conditions

Section Content: Requirements that the parties must meet before closing the transaction.
Importance: High
Potential for Disagreement: Moderate to High

Some Common Solutions:

• Clearly define all required regulatory approvals and third-party consents to the transaction (like seller’s clients), which party is responsible for obtaining them, and by when.
• Include provisions for how to resolve material adverse changes (MACs, or substantial negative developments in the seller’s business).
• Set realistic timelines for satisfying these conditions.

A Sample Conflict’s Resolution: In a cross-border transaction, the parties disagreed on how to allocate the risk of failing to obtain regulatory approval. The buyer reserved the right to terminate if our client, the seller, didn’t obtain all required approvals within 6 months. We proposed a 12-month term and a shared responsibility between the buyer and the seller for completing the regulatory application process. Buyer and seller finally agreed to split the difference: a nine-month deadline during which both committed “reasonable best efforts” to secure approvals.

7. Dispute Resolution

Section Content: Procedures for resolving any disagreements that may arise during or after the transaction.

Importance: Moderate
Potential for Disagreement: Low to Moderate

Some Common Solutions:

• Specify the governing law and jurisdiction for disputes.
• Buyers and sellers typically agree to resolve disputes through arbitration for faster, cheaper, and more confidential resolution.
• As mentioned above, define clear procedures for resolving post-closing purchase price adjustments.

A Sample Conflict’s Resolution: During negotiations over the sale of our client, a fintech company, the parties disagreed on the forum for dispute resolution. The seller preferred arbitration in California, while the buyer wanted New York. They eventually agreed to a tiered approach: mediation for 30 days, followed by binding arbitration under the rules of the American Arbitration Association, with the proceedings held at a location roughly midway between them.

8. Termination Rights

Section Content: Outlines the circumstances under which either party can walk away from the deal before closing.
Importance: Moderate to High
Potential for Disagreement: Moderate

Some General Solutions:

• Define specific events that trigger termination rights.
• Include provisions for break-up fees or expense reimbursement in case of termination, and by whom for what.

A Sample Conflict Resolution: In one of our recent tech company sales, the parties disagreed on the terms of the Material Adverse Condition (MAC) clause. The seller wanted a narrow definition with many exceptions, while the buyer sought a broad definition with few exceptions.

They compromised by excluding industry-specific developments (e.g., changes to tech standards). Rather, they agreed on a dual-materiality test that required both company-specific and industry-wide impacts for an event to qualify as a true MAC when the revenue reduction exceeded 7.5%. In other, more severe cases where a development solely affected the seller and was substantial, such as the loss of a client accounting for 10% or more of sales, the parties agreed to treat it as a MAC.

And Now, Some Handy PA Negotiation Tools

Exploit Data Room Analytics: Track which information buyers access in the VDR (virtual data room). The objective is to identify which due diligence documents they access most often. Doing so gives the seller an opportunity to identify potential buyer concerns and propose ways to address them in the PA.

Implement a “Ticking Fee”: If you, as a seller, face the risk of a lengthy regulatory approval process beyond your control, consider negotiating a “ticking fee” that increases the purchase price by a small percentage for each month past an agreed-upon target closing date.

Use Reps and Warranties Insurance (RWI): RWIs can bridge negotiation positions by transferring risk to an insurer. They can also enable the parties to agree on a lower indemnification cap and shorter survival period. Their premiums are also remarkably cheap.

Negotiate Specific Performance Rights: Ensure the PA includes robust specific performance provisions that require the buyer to close the transaction within a specified timeframe upon all conditions being met.

Also consider a “Reverse Termination Fee:” In deals with significant regulatory risk over which the seller had no influence, negotiate a reverse termination fee payable by the buyer to the seller if the transaction fails to close due to that issue.

For additional nuts-and-bolts suggestions on how to step around deadly negotiation quicksand, see How to Avoid the 10 Most Common M&A Deal Traps. And for more background on the two key M&A documents that precede the perfect PA, see The Perfect CIM and The Perfect LOI.

Emerging PA Trends

Increased Focus on Cybersecurity: PAs now often include representations and warranties regarding the seller’s cybersecurity and data protection practices, especially in businesses with significant online exposure.

ESG Scores: Over the past few years, larger buyers have been raising concerns in PAs about the seller’s environmental, social, and governance (ESG) scores. Fortunately, this trend is subsiding under the current administration.

Pandemic-Related Provisions: In the wake of COVID, some PAs now address pandemic-related risks and their impact on the seller’s business.

AI and Machine Learning (ML) Reps: For tech companies, some PAs now include reps addressing the use and ownership of AI and ML algorithms, part of a broader trend toward deeper inquiries into the seller’s IP ownership and protection.

SPAC Transaction Provisions: The popularity of Special Purpose Acquisition Companies (SPACs) as purchasing vehicles comes and goes. When they’re hot, their PAs address SPAC-specific issues like “de-SPACing” processes and PIPE investments.

Congratulations. Now you’re among the few business owners who know how to create the perfect M&A purchase agreement.

A Partial Bibliography

Purchase and Sale Agreements
Reps and Warranties: A Complete Guide
M&A (Mergers and Acquisitions) Litigations: Common Disputes and Resolutions
Definitive Purchase Agreement: What you need to know about PAs
M&A Drafting Guide – Asset Purchase Agreements
Avoiding M&A Disputes: 5 Things You Must Do on Your Next Deal
An Enterpreneur’s Guide to the M&A Sale Transaction Process and Deal Terms 

Got more questions about M&A purchase agreements? Drop us an email.
Revised 2/3/26. © Kuhn Capital 2026. All Rights Reserved.