Business Purchase Agreement Explained for Buyers

A business purchase agreement is the detailed contract that usually follows a letter of intent. It sets out what you are buying, what you pay, what the seller says is true, what each side must do before and after closing, and who pays if something goes wrong. Most agreements share the same main parts, and this primer walks through them in plain English, including the spots where insurance shows up. It is for buyers about to receive a first draft, or reading one now.

The short answer

The main parts are price and structure, representations and warranties, covenants, conditions to closing, indemnification and escrow, termination and remedies, and schedules.
Who holds the pen varies, so ask early. Many small deals sign and close on the same day, while others sign first and close later, which makes the conditions and promises in between matter.
Indemnification is a promise inside the contract, not insurance. It is worth only the money and the time limits behind it.
Insurance appears in the seller's statements about its policies and claims, in promises to keep coverage in force, in tail obligations and in the indemnity terms.
Representations and warranties insurance (RWI) is common in larger deals and can be hard to justify in small ones, so ask a specialist before you assume it fits.

What is in a business purchase agreement?

Real agreements vary in order and labels. Treat this table as a list of topics to cover with your attorney, not as a form.

The main parts of a purchase agreement
Part	What it does in plain words	What to ask your attorney
Parties and structure	Names the buyer and seller and says whether you buy assets, stock (or membership interests) or merge	Is the buying entity formed, and is the structure the one the lender and insurers were told about?
Price and payment	Sets cash at closing, any seller note or earnout, escrow or holdback, assumed liabilities, how the price is allocated and any working capital adjustment	What does each piece cost me, and which does my lender allow?
Representations and warranties	The seller's statements of fact about the business, with exceptions listed in disclosure schedules	Are they qualified by the seller's knowledge, and do they cover insurance and claims?
Covenants	Promises about how each side acts, for example running the business normally until closing	What must the seller keep in force and report between signing and closing?
Conditions to closing	Events that must happen before either side has to close, such as financing and landlord approval	Can I walk away if the lender or a key contract falls through?
Indemnification	The seller's promise to reimburse you for losses from false statements, broken promises or liabilities the seller keeps	What are the basket, cap and survival period, and what is carved out?
Escrow, holdback and set-off	Ways to secure the seller's indemnity with part of the price	How much, held by whom, for how long, and when is it released?
Termination and remedies	How the deal can end and what each side can do if the other breaches	What happens to deposits and expenses if the deal fails?
Schedules and exhibits	The lists behind the clauses: assets, contracts, policies, employees, exceptions	Who prepares them, and who checks them against the records?

Who writes the agreement, and when is it signed?

One sell-side advisory firm describes the usual sequence: the letter of intent is usually non-binding, the buyer's attorney normally prepares the purchase agreement, and the signed agreement replaces the letter. That is one firm's experience, not a rule. See what a letter of intent is for how the earlier document fits.

The timing changes how much the in-between clauses matter. In many small deals the agreement is signed and the deal closes on the same day. In larger deals the parties sign first and close later. In that case a bring-down usually applies: the seller's statements must still be true on closing day, or you may be able to refuse to close.

If you use a Small Business Administration (SBA) 7(a) loan, the lender's file must include the purchase agreements, all schedules and any amendments, and the lender underwrites the other debt and equity in the deal. SBA rules also limit some price tools. Seller earnouts are prohibited in 7(a) change of ownership loans, a seller note counts as your equity only if it is on full standby, and the working capital adjustment after closing is not treated as money handed back to you. Send the draft to your lender before you sign. See how SBA 7(a) acquisition loans work.

What is the seller promising about the business (representations and warranties)?

Representations and warranties (often called reps) are statements of fact the seller makes about the business. Typical topics: good standing, accurate financial statements, taxes paid, no default on key contracts, no pending lawsuits, legal compliance, employees, insurance, intellectual property, and ownership of the assets needed to run the business. Anything that is not true is listed as an exception in a disclosure schedule.

Some reps are qualified by knowledge ("to the best of Seller's knowledge"), and whether that means actual knowledge or what the seller should have known is negotiated.

For the insurance section, ask counsel whether the draft includes statements that:

list every policy, the carrier, the limits and the policy period, and attach copies;
say the premiums are paid and no carrier has sent notice of cancellation, non-renewal or a reservation of rights (the carrier says it may deny the claim later);
list all claims for a set number of years and say which are open, matching the carrier loss runs;
say the seller has told its carriers about every known claim and circumstance.

Your own review is the check on these statements. A rep that turns out to be false may give you a claim under the indemnity, subject to its limits. It does not undo the loss. See how to read loss runs.

What happens between signing and closing (covenants and conditions)?

Covenants are promises about behavior, such as operating the business as normal, keeping assets in good repair and giving you access to records and people. Conditions are the events that must happen first, such as lender approval, landlord consent and the consents of key customers. If something breaks between signing and closing, these clauses decide who can walk away. Some covenants run after closing, such as the seller's non-compete, non-solicit and transition help. See non-competes and transition agreements.

Insurance belongs here more often than buyers expect: the seller's duty to keep policies in force, tails on claims-made policies and access to old occurrence policies are all covered in the clause table below.

If something goes wrong, how does the seller pay (indemnity, escrow, set-off)?

Indemnification is the seller's promise to reimburse you for losses from a false statement, a broken promise or a liability the seller kept. It has two halves: limits on the promise and what secures it.

Limits on the seller's promise:

Basket: a minimum loss before you can claim, like a deductible.
Cap: the most the seller will pay.
Survival period: how long after closing you can bring a claim.

Fraud is commonly carved out of these limits.

What secures the promise:

Escrow: part of the price held by a neutral agent.
Holdback: part of the price you keep and pay later if no claims arise.
Right of set-off: reducing later payments to the seller, such as seller note payments, by the amount of valid claims.

A promise is only as good as the money and time limits behind it. The amounts and periods are negotiated, and there is no neutral typical figure for small deals, so this primer gives none.

With an SBA loan, ask the lender whether and how you may set off a claim against a standby seller note, because SBA's text does not settle that. How these fit with your insurance is in seller indemnities vs insurance.

A hypothetical example. These terms are invented for illustration and are not typical. A buyer pays $1,200,000 for the assets of a services company. The agreement says the seller keeps liability for work finished before closing, and it includes a rep of no pending or threatened claims. Indemnity claims face a $15,000 basket, a $120,000 cap and a 24 month survival period, and a $100,000 holdback is released after 9 months. In month 11, a customer says work the seller finished before closing caused water damage to its property two weeks before closing, and demands $50,000.

Walking the claim through the agreement
Step	Question	Where to look
1	Did the buyer assume this liability, or did the seller keep it?	Assumed and excluded liabilities
2	Was the claim listed in the disclosure schedule, or does it contradict a rep?	Reps and schedules
3	Which liability policy was in force when the damage happened (an occurrence policy responds to damage in its own policy period), and did the agreement preserve access to it?	The seller's historic policies and your counsel's review
4	Is the loss above the basket and within the cap and survival period?	Indemnification terms
5	Is there cash to collect from, such as a holdback or escrow that has not yet been released?	Escrow, holdback and set-off terms

Here the work was finished before closing, so step 1 points to a liability the seller kept. Steps 4 and 5 then decide how much the buyer can recover and from what. The claim is above the basket, well inside the cap and inside the 24 month survival period, but the holdback was released in month 9, so no cash is set aside and the buyer must collect from the seller directly. That is collection risk. If the basket is a deductible, the buyer recovers $35,000. If it is first-dollar once the threshold is met, the buyer recovers $50,000. Counsel should explain which one the draft uses and whether anything secures the promise after the holdback ends.

The insurance answer in step 3 is narrower than it looks. Because the damage happened two weeks before closing, the seller's liability policy in force then is the one to ask about, if the agreement preserved access to it. If the damage had happened after closing, the buyer's own policy would be the one to ask about, subject to its exclusions. General liability responds to bodily injury or property damage, not usually to the cost of redoing faulty work, and a complaint about quality may be a contract or professional liability question instead. Which policy responds depends on the form (occurrence or claims-made), the claim and the deal structure, so ask your broker and counsel before assuming insurance will pay.

Does insurance replace the seller's promise, and what about deal insurance?

No. Your own liability policies respond to claims they are written for, subject to their terms. They do not pay for a false statement in the agreement, a price dispute or a liability the seller kept unless the policy says so.

Representations and warranties insurance (RWI) is a specialty policy, usually bought by the buyer, that pays for loss from a breach of the seller's reps. It is common in larger deals (about 63% of the 139 deals in the 2025 American Bar Association study, which covered deals from $25 million to $900 million, referenced it). Because of minimum premiums, underwriting fees and retentions, it can be hard to justify on small deals, so ask a transactional risk broker for an indication. See seller indemnities vs insurance.

What insurance clauses should you ask for?

Insurance clauses to raise with deal counsel
Clause	What to ask for	Why
Insurance and claims representation	A schedule of policies, five years of loss runs and a statement that claims have been reported	Gives you a document to test against the carrier records
Keep-in-force covenant	The seller keeps policies in force and reports claims promptly through closing and for any transition period it is still working	Helps avoid a gap between signing and closing, and helps keep claims-made policies and their retroactive dates intact
Access and cooperation	Access to the seller's agent and carriers, and help with claims after closing	Old claims are easier to handle with the seller's cooperation
Seller's tail on claims-made policies	Who buys it, for how long and who pays, and whether it covers claims about the seller's pre-closing work reported after the old policy ends. Buyers' counsel often ask the seller to buy tails in an asset deal. Many policies also have change-in-control clauses, so ask your broker what notice is required	Mainly protects the seller's entity. A tail covers only acts before it starts, and its terms can differ from the expiring policy. See prior acts and tail coverage
Your own retroactive date	Whether your new claims-made policies can set a retroactive date (the earliest date of work covered) that reaches back to cover the predecessor's work	Helps reduce a gap for old claims. A tail alone does not protect the buyer's new policy
Historic occurrence policies	Name the policies and preserve your rights to them where the law and the policy allow. Insurance rights do not necessarily follow transferred liabilities, and one law firm's 2026 guidance recommends naming the seller's historic policies instead of relying on general assignment language	Keeps access to older coverage for long-tail claims
Insurance proceeds and indemnity	How losses are calculated when insurance pays part of them, and who must claim first	Affects how much you recover and when
Risk of loss before closing	Who bears the loss if assets are damaged between signing and closing, whether the seller must keep insuring them, who gets any insurance proceeds, and whether you can walk away or adjust the price	Matters when signing and closing are on different days
Closing deliverables	Evidence of your coverage, and any endorsements the lender requires. In an asset purchase your new company needs its own policies at closing, because standard policy conditions say an insured's rights and duties may not be transferred without the insurer's written consent. See what happens on closing day	Lenders usually want proof before funds move

In a stock or membership interest purchase the seller's policies stay with the company you buy, so ask counsel to cover change-in-control notices on claims-made policies and the workers' compensation ownership change report, and ask who bears any audit balance for the pre-closing period.

Send your broker the draft and the schedules as early as you can. A Morrow review can compare the seller's policies against these clauses and flag questions for your attorney. It does not replace one, and a review is not coverage.

Keep reading

Frequently asked questions

I just got the first draft. What do I do first?

Send it to your deal counsel, your lender and your insurance broker at the same time. Counsel reads the legal terms, the lender checks that price tools such as a seller note or working capital adjustment fit the loan, and the broker checks the insurance statements against the real policies. Ask for the schedules too, because the lists behind the clauses are where mistakes hide.

Is a purchase agreement the same as a letter of intent?

No. A letter of intent records the main terms and a few binding promises before the full contract exists. The purchase agreement is the detailed contract, and once signed it often replaces the letter. Have counsel read both to see which one binds you.

Do I need an attorney to buy a small business?

SBA's own guide for buyers of existing businesses says to consider hiring an attorney and an accountant. Morrow is an insurance agency, not a law firm, so it can flag insurance questions but cannot advise on contract terms. Your deal counsel should write or review the agreement.

What happens if the seller's statements turn out to be false?

It depends on the agreement. Usually you make an indemnity claim, subject to the basket, cap and survival period, and you collect from whatever secures it, such as an escrow or holdback. Fraud is commonly carved out of the caps. Counsel can tell you what your draft says.

Does insurance cover what the seller did before closing?

Sometimes, depending on the policy form and the deal. Occurrence policies generally respond to damage during their policy periods, while claims-made policies respond to claims made while in force or under a tail, and only for acts on or after the retroactive date, all subject to terms, exclusions and limits. Ask counsel to preserve access to the seller's historic policies and ask your broker which forms apply.

Can I buy representations and warranties insurance on a small deal?

Sometimes, but minimum premiums, underwriting fees and retentions can make it hard to justify on small deals. Ask a transactional risk broker for an indication, and remember that policies typically exclude matters the buyer knew about before the policy started, so ask your counsel and the broker what a quote would exclude.

References

Just bought a business? Get your insurance reviewed.

Send Morrow the declarations pages, loss runs and key contracts you inherited. Morrow can review them against the business you bought, flag gaps and request quotes where it makes sense. Any new terms depend on carrier underwriting.

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This article is general information, not legal, tax or financial advice, and not a coverage determination. Coverage depends on the actual policy wording, carrier underwriting, your purchase agreement and your contracts. Ask your attorney and accountant about deal and legal questions.

What a Business Purchase Agreement Covers