How to Draft Stock Purchase Agreements

Buying or selling shares in a company sounds simple until you sit down to put it in writing. Then the questions pile up. Who's actually promising what? What happens if something goes wrong after the deal closes? Who pays if the company gets sued next year for something that happened last year?

A stock purchase agreement (SPA) is the document that answers all of that. It's the contract that transfers ownership of a company's shares from a seller to a buyer, and it spells out exactly what each side is agreeing to. Get it right, and both parties walk away with a clear understanding of the deal. Get it wrong, and you're looking at disputes, lawsuits, or a transaction that falls apart at the worst possible time.

This guide walks through how to draft one, section by section, without the legal jargon that usually makes these documents so hard to approach.

What a Stock Purchase Agreement Actually Does

An SPA covers the sale of existing shares in a company, as opposed to an asset purchase agreement, which covers the sale of specific assets (equipment, contracts, intellectual property) rather than the company itself. When someone buys stock, they're stepping into the shoes of the previous owner, taking on the company exactly as it stands, including its liabilities.

That last part is why SPAs tend to run long. Because the buyer is inheriting everything, the agreement has to address every risk that comes with it, which is why a well-drafted SPA usually contains far more than a price and a signature line.

Start With the Basics: Parties, Shares, and Price

Every SPA opens with the fundamentals. Name the buyer and seller exactly as they appear on legal documents. State the number and class of shares being sold. If the company has multiple share classes (common, preferred, different voting rights) be specific about which ones are changing hands.

Then comes the purchase price. This section needs to state:

• The total price and how it was calculated

• Whether payment happens in cash, stock, or a mix of both

• Any adjustments tied to the company's financial position at closing (a working capital adjustment, for example)

• The payment schedule, including any amount held back for later (an escrow)

Price adjustments trip up a lot of first-time drafters. If the deal includes an earnout, where part of the price depends on the company hitting future targets, define those targets with numbers, not general language like "strong performance."

Representations and Warranties: Where the Real Work Happens

This is the section that does most of the heavy lifting in any SPA. Representations and warranties are statements of fact that each party makes about themselves or the company, and they're the mechanism that lets a buyer walk away or sue if something turns out to be false.

Seller representations typically cover:

• The company is properly organized and in good standing

• The seller actually owns the shares and has the right to sell them

• The company's financial statements are accurate

• There's no undisclosed litigation, debt, or tax liability

• The company hasn't violated any laws or contracts

• All required licenses and permits are in place

Buyer representations are usually shorter, covering things like the buyer's authority to enter the deal and confirmation that they have the funds to pay.

Draft these carefully. Vague representations protect no one. "The company has no significant liabilities" invites an argument over what counts as significant. "The company has no liabilities exceeding $10,000 except as listed on Schedule 4.2" leaves nothing to interpret.

Covenants: What Happens Between Signing and Closing

Deals don't always close the moment they're signed. There's often a gap while regulatory approvals come through or financing gets finalized. Covenants govern that in-between period.

A typical covenant section requires the seller to run the business normally, without taking on new debt, selling assets, or making major decisions without the buyer's consent. It might also include a non-compete clause, keeping the seller from starting a rival business right after the sale, and confidentiality terms covering how each side handles sensitive information during and after the process.

Conditions to Closing

This section lists everything that has to happen before the deal actually goes through. Common conditions include regulatory approval, no material change in the company's business since signing, and all representations still being true at closing. If any condition isn't met, either party can typically walk away without penalty.

Keep this list realistic. Piling on conditions that are hard to satisfy just gives either side an easy excuse to back out later.

Indemnification: Who Pays When Things Go Wrong

Indemnification is the clause that decides who's financially responsible if a representation turns out to be false or a covenant gets broken after closing. It's often the most negotiated part of the entire agreement, because it determines how risk gets shared once the deal is done.

Key points to nail down:

• Survival period — how long representations remain enforceable after closing (commonly one to three years, though tax and fraud issues often run longer)

• Cap — the maximum amount a party can be required to pay out

• Basket or threshold — the minimum loss required before a claim can even be made

• Process — how claims get submitted and resolved

Buyers generally want longer survival periods and higher caps. Sellers want the opposite. Where these numbers land usually reflects the relative bargaining power of each side, so expect this section to take real negotiation.

Other Clauses Worth Including

A few more provisions round out most SPAs:

• Governing law and jurisdiction, so both sides know which state or country's laws apply and where disputes get resolved

• Dispute resolution, specifying whether conflicts go to court or arbitration

• Termination rights, covering when either party can walk away before closing

• Confidentiality, protecting sensitive business information shared during due diligence

• Entire agreement clause, confirming that the written contract is the full deal, not any prior verbal promises

Practical Tips for Drafting

Use schedules and exhibits for anything detailed, like lists of contracts, litigation, or intellectual property. Keeping the main body clean and pushing details into attached schedules makes the agreement easier to read and update.

Define your terms early. If "Material Adverse Effect" or "Knowledge of the Seller" appears throughout the document, define exactly what those phrases mean in a dedicated definitions section, and use them consistently.

Match the agreement to the deal size. A small business sale between two individuals doesn't need the same 80-page document as a private equity acquisition. Scale the level of detail to what the transaction actually requires.

And finally, have both a corporate lawyer and, ideally, an accountant review the draft before signing. Tax treatment, employee liabilities, and regulatory requirements vary enough by industry and jurisdiction that a generic template rarely covers everything a specific deal needs.

Wrapping Up

A stock purchase agreement is really a risk allocation document dressed up as a sales contract. Every clause, from the representations to the indemnification cap, is answering the same underlying question: if something goes wrong, whose problem is it? Draft with that question in mind, be specific rather than general wherever you can, and get qualified legal review before anyone signs.