The LOI is a non-binding roadmap. The Purchase Agreement is the contract that actually sells the business. It's 60 to 80 pages of dense legal language, and every section carries real consequences — most of which continue long after you've signed and cashed the check.
This is not a document you skim and sign. Everything that matters in the deal — what you're selling, how you're paid, what you're guaranteeing, what you can't do for the next three to five years — lives in here. If you have an M&A attorney, have them read every word with you. If you don't, read it yourself, slowly, and flag anything you don't understand.
The Six Major Sections
A standard Purchase Agreement breaks down into six major areas. Purchase Price and Allocation covers total price, payment terms, and how the price is allocated across asset categories. Included and Excluded Assets defines what transfers to the buyer and what stays with you. Reps and Warranties are your formal statements that the business is what you said it is. Indemnification defines what happens — and what you owe — if those statements turn out to be false. Non-Compete restricts what you can do after the sale. Closing Conditions list the escape hatches that let either party walk away before money changes hands.
Each section works with the others. Price and allocation drive your taxable gain. Reps define what you're guaranteeing. Indemnification sets the consequences. Non-compete limits your future. Closing conditions determine who has leverage if something goes sideways in the final weeks. Understanding them as a system is how you spot where the buyer's attorney has tilted the agreement.
Purchase Price and Payment Terms
This section spells out exactly how much you get and when. Total consideration includes the base price plus any earnout, escrow, and other payments. Payment timing breaks out what lands at closing versus what's deferred via seller note, earnout, or escrow holdback. Adjustment mechanisms cover working capital pegs and net debt calculations that shift the final number up or down at closing.
The allocation of purchase price across asset categories is where the tax implications live. Goodwill is taxed as capital gains — good for you. Covenants not to compete are taxed as ordinary income — bad for you. Buyers sometimes push more allocation toward non-compete because it's better for their tax treatment. If you're working with a CPA, model the allocation before it's locked in.
Reps and Warranties
By signing, you're swearing a list of statements is true. The financials are accurate and match tax returns. No hidden liabilities — debts, litigation, obligations. Contracts are valid and in effect. You have the licenses, permits, and regulatory approvals needed to operate. You own the assets you're selling, free of liens. Payroll records are accurate and there are no pending employee claims. Intellectual property is properly yours to transfer.
Reps are usually broad but have exceptions. "All financial statements are accurate, except as disclosed in Schedule B." So if you have a known issue, disclose it upfront. That's not a breach — that's transparency, and it's what keeps the disclosure from becoming an indemnification claim two years later.
Indemnification: Your Post-Closing Liability
This is where risk stays with you after the wire hits. If a rep turns out to be false and costs the buyer money, you reimburse them. Four terms define your exposure.
Caps limit your total liability — typically 10–50% of the purchase price, occasionally uncapped for fraud. Baskets set a threshold before claims can be made — the buyer eats the first $25K–$50K themselves. Survival periods define how long the buyer has to bring claims — usually 12–24 months, sometimes longer for tax and environmental items. Escrow is a holdback (usually 5–10% of the purchase price) that sits in escrow for 12–18 months to cover potential claims.
Push for a short survival period, a meaningful basket, a reasonable cap, and modest escrow. Rep and warranty insurance is another option on larger deals — the buyer pays a premium and shifts risk to the insurer instead of you.
Here's how this plays out. Purchase price $2M. You rep that all financials are accurate. During post-closing review, the buyer discovers your cash-basis books and the accrual financials prepared for sale diverge in a way that lowers true EBITDA by $100K. With a $50K basket and 15% cap ($300K), the buyer recovers $50K (the amount above the basket). Not catastrophic, but real. Accuracy in the CIM and disclosure schedules is what keeps numbers like this from becoming a multiple of themselves.
Non-Compete: What You Can't Do After Selling
Non-competes are standard and buyers insist on them for obvious reasons. But the terms vary wildly and this is where a lot of sellers give up more than they should.
Term is typically 3–5 years, sometimes 2–10. Geography can be reasonable (your current market, your state, your region) or onerous (the whole country, the world). Scope defines what type of business you're restricted from — the same business, related businesses, anything adjacent. Employee non-solicit usually runs 1–2 years. Customer non-solicit usually runs 1–3 years. Example of a reasonable non-compete: "Cannot own or work for a competing IT services business in the tristate area for three years."
Push back on overreach. 10-year non-competes are onerous. National scope on a regional business is overreach. Scope that restricts you from your profession entirely is often unenforceable. Negotiate it down to what makes sense for your post-sale life.
What to Negotiate Hardest
You can't win every point. Pick your battles. In order: purchase price (it's locked here, so get it right), payment terms (maximize cash at closing), reps scope (limit to things you actually know are true), indemnification caps and baskets (lower cap = less exposure), survival periods (12 months is better than 24), non-compete terms (scope and geography should be reasonable). Let the buyer win on secondary items. The goal is a deal that closes and protects you — not a perfect contract.
Closing Conditions and Escape Hatches
The final section lists conditions that must be met before closing can happen. Financing contingency — the buyer's SBA loan must be approved. No material adverse change — the business can't suffer a major event between LOI and closing. Third-party consents — landlord, key customers, lenders must consent where required. Reaffirmation of reps — your reps must be true at closing, not just at signing. Execution of documentation — all the ancillary agreements must be signed.
These conditions define who has leverage in the final weeks. If a major customer gives notice the week before closing, that's a potential MAC clause invocation. If the SBA lender adds conditions, financing contingency is in play. Understand them so nothing catches you by surprise.
Ready to walk into your Purchase Agreement review with clear eyes? Torch helps you understand every section, benchmark terms against typical market deals, and coordinate with your attorney so you sign a contract that protects you long after closing.