Stock Purchase Agreement (SPA)
The definitive agreement for a stock sale transaction — governing the purchase of equity interests in the target company. The SPA covers: representations and warranties, covenants (pre-close and post-close), closing conditions, purchase price mechanics, indemnification framework, and dispute resolution. Distinct from an APA (which governs asset sales). Stock sales use SPAs; asset sales use APAs. See full treatment at [APA (Asset Purchase Agreement)](#apa-asset-purchase-agreement) and [Stock Sale](#stock-sale).
Full Definition
A stock purchase agreement (SPA) is the definitive legal contract governing the purchase and sale of shares in a target company. Unlike an asset purchase agreement (APA) — which transfers specific assets and liabilities — the SPA transfers ownership of the corporate entity itself, including all of its assets, liabilities, contracts, employees, and obligations, both known and unknown. The SPA is one of the two main transaction structures in M&A, alongside the APA.
A typical SPA contains: a purchase price and payment mechanics (including working capital adjustments, earnout provisions, and escrow terms); representations and warranties by the sellers about the company's business, financial condition, legal compliance, and ownership; closing conditions that must be satisfied before the transaction closes; pre-closing covenants governing how the company operates between signing and closing; post-closing obligations such as indemnification, non-compete and non-solicitation agreements, and employee transition arrangements; and termination provisions including breakup fees.
SPAs allocate risk between buyers and sellers through the reps and warranties framework. The seller represents that specific facts about the company are true; if those representations turn out to be false, the seller indemnifies the buyer for resulting losses. The scope, survival period, basket, cap, and exclusions of the indemnification regime are the most heavily negotiated provisions in the SPA.
In SMB M&A, SPAs are most common when the buyer wants to preserve the target's existing contracts, customer relationships, and licenses (which may require assignment notices or consents under an APA). Stock sales also tend to be more tax-efficient for sellers (capital gains rates on the stock sale proceeds) but less tax-efficient for buyers (who inherit the company's historical tax basis in its assets and cannot step up for depreciation purposes — unless a 338(h)(10) or 336(e) election is made).
Seller vs. Buyer Perspective
A stock sale gives you capital gains tax treatment on most or all of the proceeds — generally the most tax-efficient outcome for an individual seller. However, it means the buyer is taking on all your historical liabilities, which makes them nervous. Expect intense scrutiny of your indemnification provisions: the buyer will push for broad survival periods, low baskets, and high caps. Your goal is to limit post-closing indemnification exposure by negotiating a short survival period (12–18 months), a reasonable basket ($50K–$150K on a $5M deal), and a cap tied to the purchase price (not unlimited).
An SPA gives you the target company holistically — you do not need to renegotiate contracts or transfer licenses individually, as you would in an APA. However, you inherit all historical liabilities, including those you did not discover in diligence. Representations and warranties insurance (RWI) is an important mitigation tool: the policy covers buyer losses from breach of seller reps, replacing or supplementing seller indemnification with an insurer's balance sheet. RWI is increasingly available in SMB transactions as small as $10M deal value.
Real-World Example
A buyer acquired 100% of a $6M EBITDA specialty logistics company via stock purchase for $28M. The SPA included a $2.8M escrow (10% of purchase price) held for 18 months to cover indemnification claims. Reps and warranties insurance was purchased for $200K premium covering up to $5M in losses from breached representations, with a $280K retention (the buyer absorbed losses below this threshold before the policy applied). Post-close, the buyer discovered an unpaid sales tax liability of $150K — within the deductible, covered by the escrow.
Why It Matters & Common Pitfalls
- !Inherited unknown liabilities. The most significant SPA risk for buyers is liabilities that were not discovered in diligence — environmental claims, employment class actions, regulatory violations. Rep and warranty insurance, thorough diligence, and adequate escrow reserves are the primary mitigants.
- !Survival period negotiation. Sellers want short rep survival periods (12–18 months). Buyers want longer periods, particularly for fundamental reps (ownership, capitalization, authority), tax reps, and environmental reps, which may survive for the statute of limitations. Know which reps are worth fighting for longer survival.
- !Working capital peg errors. The closing working capital adjustment is one of the most disputed post-close items in SPAs. Define working capital precisely in the agreement — which accounts are included, how items like customer deposits and deferred revenue are treated — to avoid post-closing disputes.
- !No materiality scrape. Many SPAs include materiality qualifiers in reps (e.g., no material adverse contracts). Without a materiality scrape provision, these qualifiers apply in the indemnification calculation, meaning small breaches go uncompensated even if they are real. Buyers should push for a materiality scrape.
Frequently Asked Questions
What is a Stock Purchase Agreement?↓
What's the difference between an SPA and APA?↓
Related Terms
APA (Asset Purchase Agreement)
The definitive legal contract that governs an asset sale — specifying which assets are acquired, which liabilities are assumed, the purchase price, and the post-close protections for both sides.
Stock Sale
A transaction in which the buyer purchases the stock (or equity interests) of the target company, acquiring the entity itself along with all its assets and liabilities — contrast with an asset sale.
Definitive Agreement
The final, binding purchase contract governing an M&A transaction — containing all terms, representations, warranties, indemnification provisions, closing conditions, and covenants agreed between the parties. Typically signed 30-90 days after LOI.
Representations & Warranties
Statements of fact the seller makes about the business in the purchase agreement — covering everything from financial accuracy to contract validity — with indemnification remedies if any prove false.
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Disclaimer: The information provided on this page is for educational and informational purposes only. It should not be considered financial, legal, or investment advice. Business valuations depend on many factors specific to each situation. Always consult with qualified professionals — including business brokers, CPAs, and M&A attorneys — before making acquisition or sale decisions. LegacyVector is not a licensed broker, financial advisor, or attorney. Data shown may be based on limited samples and may not reflect current market conditions.
LegacyVector Research Team
Reviewed by M&A professionals · Updated April 2026