Understanding the key terms in your share purchase agreement

For many SME business owners, the moment the share purchase agreement arrives is when the transaction begins to feel real. What may have started as a straightforward commercial discussion is now expressed through detailed legal drafting, with each clause carrying weight and consequence.

A share purchase agreement is where the commercial deal is translated into legal reality. It is not just about recording what has been agreed. It is about allocating risk, anticipating issues and ensuring that both parties are clear on their rights and obligations.

In this article, we explore the key provisions typically found in a share purchase agreement, how due diligence influences negotiations, and the legal and tax considerations that underpin a successful transaction.

Although every transaction has its own nuances, most share purchase agreements follow a broadly similar structure. Understanding the purpose behind the key provisions can make the document far more accessible and help business owners engage confidently in the negotiation process.

Purchase price and payment terms

The purchase price is often the headline figure that attracts the most attention. However, the way that price is structured and paid can have an equally significant impact on the overall value of the deal.

In many transactions, the price is not paid entirely on completion. Instead, it may be divided into different components, for example:

• an initial payment on completion;
• deferred consideration payable at a later date; and
• an earn-out, where part of the price depends on the future performance of the business.

While these mechanisms can help bridge valuation gaps between buyer and seller, they also introduce ongoing financial connections after completion. For sellers in particular, this can mean that part of the value of the deal remains subject to factors outside their control. Careful drafting is essential to ensure that payment terms are clear, measurable and enforceable.

Our corporate and commercial team can advise you on how best to structure your payment terms.

Warranties and disclosure

Warranties are a central feature of any share purchase agreement. They are statements made by the seller about the condition of the business, covering areas such as financial information, contracts, assets, employees and compliance with laws.

From the buyer’s perspective, warranties provide reassurance and a route to compensation if the business is not as described. For the seller, they represent a potential source of liability after completion.

This is where the disclosure process becomes critical. Sellers are given the opportunity to qualify the warranties by disclosing matters that might otherwise constitute a breach. For example, if there is an ongoing dispute or an unusual contractual arrangement, this can be disclosed against the relevant warranty.

A well-prepared disclosure exercise is not simply a defensive step. It is a key risk management tool. Clear, specific and properly evidenced disclosures can significantly reduce the likelihood of future claims and provide greater certainty for both buyer and seller.

Indemnities

Indemnities sit alongside warranties but serve a different purpose. Rather than providing general protection, they are used to allocate risk regarding specific, identified issues.

These might arise from matters uncovered during due diligence, such as:

• a known tax exposure;
• an ongoing piece of litigation; or
• a regulatory concern affecting the business.

Indemnities are often more favourable to buyers than warranty claims, as they can provide a direct pound-for-pound recovery without the need to prove loss in the same way. As a result, they are frequently the subject of detailed negotiation.

For sellers, the key is to ensure that indemnities are tightly drafted and limited to clearly defined risks, rather than becoming open-ended obligations.

Restrictive covenants

Restrictive covenants are designed to protect the goodwill that the buyer is acquiring. Without them, a seller could theoretically sell a business and then immediately set up in competition.

These clauses typically prevent the seller from:

• competing with the business;
• soliciting its customers; or
• recruiting its employees.

While such restrictions are common, they must be reasonable in scope, duration and geographical reach to be enforceable. For business owners, this is an important area to consider carefully, particularly where future ventures or ongoing involvement in the sector are anticipated.

Due diligence and its impact on the share purchase agreement

Due diligence is the process by which the buyer investigates the target business before committing to the transaction. It acts as both a verification exercise and a risk assessment, and its findings often shape the content of the share purchase agreement.

Typically, due diligence will focus on areas such as:

• financial performance and historic accounts;
• key commercial contracts and customer relationships;
• employees, pensions and HR matters; and
• regulatory compliance and potential liabilities.

As information is uncovered, it can influence the transaction in several ways. For example, issues identified during due diligence may lead to:

• a renegotiation of the purchase price;
• the inclusion of specific indemnities to address known risks; or
• structural changes to the transaction itself.

In some cases, matters revealed during due diligence may also require further investigation or remedial action before completion can take place.

For sellers, this underlines the importance of preparation. A well-organised business, with accessible records and a clear understanding of its own risk profile, is far better placed to navigate due diligence smoothly and maintain control of the narrative during negotiations.

Legal and tax considerations

Beyond the commercial terms of the share purchase agreement, there are a number of legal and tax steps that must be addressed to ensure the transaction is properly implemented.

From a legal perspective, this will typically include:

• obtaining any necessary board and shareholder approvals;
• agreeing and coordinating the mechanics of completion, including the exchange of documents and funds; and
• making the required filings at Companies House to reflect the change in ownership.

Each of these steps plays a role in ensuring that legal title to the shares passes correctly and that the transaction is effective in law.

Tax considerations are equally important and should not be treated as an afterthought. The structure of the transaction can have significant implications for both buyer and seller, affecting the overall value realised from the deal.

Obtaining specialist tax advice at an early stage can help to:

• identify the most efficient way to structure the transaction; and
• determine whether any reliefs or exemptions may be available.

Failing to address tax properly can lead to unexpected liabilities or missed opportunities, which in some cases can significantly affect the outcome of the transaction.

How we can help

A share purchase agreement is a detailed and technical document, but at its core, it is about protecting the deal you have worked hard to negotiate.

Our corporate and commercial team provides clear, commercially focused advice throughout the process. We can assist with:

• reviewing and explaining share purchase agreement terms in plain English, so you understand both the legal effect and the commercial implications;
• advising on negotiation strategy and the overall structure of the transaction;
• drafting and negotiating the share purchase agreement and all supporting documentation;
• managing the due diligence and disclosure process to ensure it is efficient and properly coordinated;
• supporting you through completion and any post-completion requirements; and
• acting as a sounding board throughout, helping you make informed decisions at each stage.

We focus on achieving a balance between protecting your position and keeping the transaction practical, proportionate and on track.

For a conversation about a proposed sale or acquisition, please contact Richard Wrightson at our York office on 01904 624185.  

This article is for general information only and does not constitute legal or professional advice. Please note that the law may have changed since this article was published.