Share Purchase Agreement: A CFO's Guide for Founders Selling

• A share purchase agreement (SPA) transfers the whole company, including liabilities, which is why buyers often prefer asset deals and sellers prefer stock deals ^[1]
• On a $10M deal, working capital adjustments, a 10% escrow holdback, and an earn-out can easily move $1-2M of your proceeds, so model them before you sign a term sheet
• Indemnification caps typically land below the purchase price and baskets at 1% or less of deal value, which is a negotiable range, not a fixed rule ^[2]
• Rep and warranty insurance usually costs 3-4% of coverage with a 1-2% deductible, and it can unlock a faster close by shrinking the escrow fight ^[3]
• The real work happens before the SPA is drafted: clean financials, a QoE report, and a tax structuring decision (338(h)(10), QSBS, rollover equity) set the terms you'll actually get

If you've gotten a term sheet and someone just said "we'll send over the SPA," you're probably wondering what you're actually signing and how much of it is negotiable. Short answer: almost all of it. The share purchase agreement is where a friendly LOI turns into specific dollar amounts, specific risk allocation, and specific consequences if something in your financials turns out to be wrong. This post walks through what's actually in it, how the money moves, and what you should do before your lawyer ever opens a draft.

1. What Is a Share Purchase Agreement?

A share purchase agreement (SPA) is the legal contract that transfers ownership of a company by transferring its shares, rather than its individual assets, from seller to buyer ^[1][4]. It sets the price, the conditions for closing, and who's on the hook if something goes wrong after the deal closes ^[5]. It's sometimes called a stock purchase agreement, same thing, different word for the same piece of paper ^[4].

Because an SPA transfers the entity itself, the buyer inherits everything inside it: contracts, employees, tax history, pending lawsuits, that one vendor agreement nobody remembers signing ^[1]. That single fact drives almost every negotiation point in the rest of this post. If you're earlier in the process and still deciding how to position your company for a sale, our mergers guide is a good place to start before you get to SPA language at all.

2. Share Purchase Agreement vs. Asset Purchase Agreement: Which Should You Push For?

Sellers generally want a share sale because it's a cleaner exit with capital gains tax treatment and no asset-by-asset transfer mess; buyers generally want an asset sale because they can cherry-pick what they take on and get a stepped-up tax basis ^[1]. The right answer for you depends on your entity type, how clean your liability history is, and how much leverage you have in the process.

As a rule of thumb: if you're a C-corp with a clean history and QSBS eligibility, push hard for a stock sale. If your company has messy legacy contracts, a prior lawsuit, or liabilities you can't fully quantify, expect the buyer to hold firm on an asset deal, and don't fight that battle at the expense of the ones that actually move your proceeds, like the price adjustment mechanics in section 5. For the bigger picture on structuring the whole transaction, see our merger and acquisition strategy guide.

3. How Does a Stock Purchase Agreement Work, From LOI to Closing?

An SPA doesn't appear out of nowhere. It follows a term sheet or letter of intent that sets the headline terms, then due diligence feeds the specifics into the draft, and the buyer's counsel usually writes the first version ^[6]. For a lower-middle-market company, the whole run from LOI to close typically takes four to nine months ^[7].

Notice how much of this timeline is diligence and negotiation, not drafting. The SPA itself is usually a few weeks of back-and-forth once the real numbers (working capital, debt-like items, the QoE findings) are settled. If you want to shorten that window, the leverage is in showing up with clean financials, not in rushing the legal drafting. Understanding the broader m&a landscape for your sector also helps you gauge whether you're negotiating from a buyer's or seller's market.

4. What Are the Key Provisions in a Share Purchase Agreement?

Every SPA contains the same core building blocks: parties and consideration, representations and warranties, covenants, conditions precedent, and indemnification ^[1][6]. The language is dense, but each section answers a plain question: who's selling what, what are they promising is true, what do they have to do before and after closing, and who pays if a promise turns out to be false.

Representations and warranties

These are the seller's statements of fact, about financials, ownership, contracts, compliance, that the buyer is relying on ^[1]. If a rep turns out to be false, it's usually the trigger for an indemnification claim, which is why your QoE process (section 7) matters so much here.

Indemnification: caps and baskets

Indemnification caps are the maximum amount a seller has to pay back if a rep breach surfaces after closing, and most deals set that cap below the full purchase price, often in the 1-10% range for a meaningful chunk of transactions ^[2]. A basket is the deductible: a $2M tipping basket means if losses hit $4M, the seller owes the whole $4M, not just the amount over $2M ^[2]. Most baskets land at 1% of deal value or less ^[2].

Conditions precedent and covenants

Conditions precedent are the things that must happen before closing, regulatory clearance, third-party consents, financing confirmation ^[5]. Covenants govern behavior before closing (don't take on new debt, run the business normally) and sometimes after (non-competes, transition support). These sound like legal boilerplate until a condition precedent blows your closing date by six weeks because nobody flagged a change-of-control clause in a key customer contract during diligence.

5. How Do Purchase Price Adjustments, Earn-Outs, and Escrow Actually Work? A $10M Example

The headline number in your LOI is almost never the number you receive at closing. Working capital adjustments true up the price to a target level, escrow holds back a slice as a buffer against future claims, and an earn-out defers part of the price based on hitting future milestones. Here's how that plays out on a $10M deal.

Picture a $10M services company sale. The buyer agrees to a $10M enterprise value, with a working capital peg of $1.2M based on trailing 12-month averages. At closing, actual working capital comes in $150K below the peg, so the price drops to $9.85M. The buyer also wants protection against undisclosed liabilities, so 10% of the purchase price, $985K, goes into escrow for 18 months, similar in structure to the roughly 10% / $5M holdback seen on a $50M deal ^[8]. On top of that, $1.5M of the price is structured as an earn-out tied to hitting next year's revenue target, paid out over two years if the business performs.

Run the math and the seller's cash at closing is roughly $7.37M ($9.85M minus the $985K escrow minus the $1.5M earn-out holdback), with the rest arriving later, and only if the earn-out milestones are met and no indemnification claims eat into escrow. That gap between "headline price" and "cash in hand at closing" is the single most common surprise founders run into, and it's entirely predictable if you model it before you sign the LOI.

6. Locked Box vs. Completion Accounts: Which Fits Your Deal?

Completion accounts set the final price using the actual balance sheet at closing, with a post-closing true-up, while a locked box fixes the price as of an earlier date and protects the buyer through restrictions on "leakage" instead of a post-closing adjustment ^[9]. Which one you want depends on how stable your numbers are and how much negotiating leverage you have.

If your revenue and working capital are steady and you've got competing offers, push for a locked box, it caps your downside and gets you paid faster with fewer post-closing fights. If your business is seasonal or you've had a bumpy few quarters, completion accounts actually protect you too, since the price reflects your real numbers at closing rather than a stale snapshot that might undervalue a recent uptick.

7. How Should You Get Your Financials Ready Before Negotiating an SPA?

You get better SPA terms by walking into the negotiation with clean financials, not by having a sharper lawyer. The buyer's diligence team will find every mess in your books eventually, the only question is whether you find it first and explain it, or they find it and use it to cut your price.

• Normalize EBITDA: strip out owner perks, one-time expenses, and related-party transactions so the buyer's multiple applies to a real number
• Commission a QoE (quality of earnings) report before the buyer does, so you control the narrative on revenue recognition and customer concentration
• Clean up the cap table: resolve any outstanding option grants, convertible notes, or ambiguous ownership before diligence starts
• Track 12-24 months of working capital trends so you can defend the peg the buyer proposes, rather than accepting theirs
• Resolve any outstanding litigation, contract ambiguities, or compliance gaps that would otherwise become a rep and warranty landmine

None of this is glamorous work. It's also the highest-leverage thing you can do before an SPA negotiation starts, because every item on that list either widens or narrows the gap between the price you're quoted and the price you actually collect.

8. What Tax Structuring Should Growth-Stage Founders Consider?

The biggest tax lever in an SPA negotiation is deciding, early, whether a 338(h)(10) election, QSBS treatment, or rollover equity applies to your situation, because each one changes what you keep after tax by a meaningful margin. This decision needs to happen before you negotiate price, not after.

A Section 338(h)(10) election lets a stock sale be treated as an asset sale for federal tax purposes, giving the buyer a stepped-up basis while the seller still gets the legal simplicity of a stock deal, but the Form 8023 filing deadline is the 15th day of the ninth month after the acquisition date, so it has to be planned, not bolted on at the last minute ^[10]. If you qualify for Qualified Small Business Stock treatment, you can potentially exclude gain on sale up to the greater of $10M (or $15M for stock issued after July 4, 2025) or 10x your basis, provided the company's gross assets stayed under the $50M-$75M threshold at issuance and you've held the stock long enough ^[11]. Rollover equity, keeping a slice of ownership in the new entity, can also defer tax and signal confidence to the buyer, though it ties part of your proceeds to the buyer's future performance. If part of your deal involves a different structure entirely, like a reorganization instead of a straight sale, it's worth understanding how a

If part of your deal involves a different structure entirely, like a reorganization instead of a straight sale, it's worth understanding how a reverse triangular merger compares on tax treatment before you commit to one structure over another.

9. Can You Write Your Own Share Purchase Agreement? How Do You Write One?

You can technically draft your own SPA, but I wouldn't recommend it for anything above a very small, simple transaction. The document carries real legal and tax consequences, and a template that's missing the right indemnification or tax election language can cost you far more than a lawyer's fee ever would.

What you can and should do is come to your lawyer with the terms already decided, rather than letting the buyer's first draft set the agenda. That's how you write a share purchase agreement that actually protects you: you negotiate the economics first, then let counsel turn them into enforceable language.

1. Agree on price mechanics first: fixed price, locked box, or completion accounts, and the working capital peg
2. Decide your indemnification position: target cap, basket size, and survival period before you see the buyer's draft
3. Settle structure and tax treatment: stock vs. asset, 338(h)(10), QSBS eligibility, rollover equity
4. Draft or review representations and warranties against your actual financials and operations, not a generic template
5. Negotiate conditions precedent and covenants, especially anything that could delay or kill the closing
6. Have counsel finalize the legal language once the economics are agreed, not before

A checklist you can hand your lawyer before the first call: purchase price and adjustment mechanism, escrow percentage and release schedule, indemnification cap and basket, survival periods for reps, tax election decisions, founder employment and non-compete terms, and any transition services commitments. Walking in with that list already filled out turns a reactive negotiation into one you're actually steering.

10. What Negotiation Sticking Points Should You Expect in a $2M-$50M Deal?

For growth-stage companies, the fights rarely happen over boilerplate; they happen over founder employment terms, non-competes, earn-out definitions, and who pays for indemnification risk. Knowing these ahead of time means you negotiate them calmly instead of under closing-week pressure.

Earn-out disputes are the most common post-closing fight, usually because the metric (revenue, EBITDA, a customer retention number) wasn't defined tightly enough in the SPA. Non-competes and founder employment agreements get contentious when the buyer wants a multi-year commitment but the founder wants an exit. And increasingly, buyers and sellers are using rep and warranty insurance to defuse the indemnification standoff entirely: premiums typically run 3-4% of the insured amount with a 1-2% deductible, and it's usually available for deals above roughly $30M, though smaller deals can sometimes qualify too ^[3]. For a $2M-$50M company, that's worth a real conversation with your advisor about whether it's cheaper than fighting over a large escrow. For more on how insurance fits into deal risk generally, see our piece on m&a insurance.

Conclusion

The share purchase agreement is where your deal's real economics get locked in, not the LOI, and not the handshake. Price adjustments, escrow, earn-outs, indemnification caps, and tax structure all move real dollars, often more than the headline multiple does. Get your financials clean, decide your tax structure, and know your negotiating position before the buyer's counsel sends the first draft. If you'd rather not build the pre-deal financial model and readiness checklist by hand, Dear CFO builds it from your QuickBooks.

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About the author

Ethan Lu

Partner, Phoenix Strategy Group

Ethan Lu is a Partner at Phoenix Strategy Group, where he works as a fractional CFO helping founder-led companies maximize their exit value. He currently oversees more than $200M in client enterprise value and has been part of multiple eight-figure exits. Before PSG he was an asset manager and investor for a San Diego family office, where he sat on the investment committee for more than $1B in assets. A data scientist by training, he holds a B.S. in Mathematics with a minor in Accounting from UC San Diego.

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