Acquisition Agreements: What Buyers and Sellers Must Negotiate

Introduction

An acquisition agreement is a contract that sets out the terms and conditions under which one company acquires another. It clearly defines what is to be acquired, the purchase price, and the allocation of risk between the buyer and the seller. Thus, it is a document that deals with assets, liabilities, and obligations, and this contract is essential for precision, as it eliminates ambiguities by defining every detail.

An acquisition agreement can be of different types based on the nature of the transaction that is taking place:

• Stock Purchase Agreement (SPA): In this type, the buyer purchases the target company’s shares and/or stock directly from the shareholders. This means that both the company’s assets and its liabilities are transferred. By doing so, the buyer essentially steps into the seller’s shoes. Thus, the company is purchased because it simplifies the transfer process, but it still requires due diligence to account for hidden risks.

• Asset Purchase Agreements (APAs): In this type of agreement, the buyer may select specific assets to avoid unwanted liabilities associated with the target company’s operations. This is useful when the buyer seeks to acquire valuable assets, such as intellectual property or equipment, and allows businesses to expand their capabilities without incurring liabilities.

• Merger Agreements: Merger agreements combine two entities into a single entity and specify the terms for combining assets, liabilities, and operational control. There are two types of mergers: a statutory merger (in which one company absorbs the other) and a consolidation (in which two companies unite to form a new company).

The above-mentioned are traditional acquisition agreements; however, specialised contracts, such as licensing and joint venture agreements, may also be used.

Key Components of an Acquisition Agreement: 

All acquisition agreements virtually have the same basic structure, composed of the following components:

1. Description of the Deal: The agreement initially states with a descriptive section where the parties discuss what is being bought or sold, how much is being paid (the consideration, in what form (cash, cheque, promise to pay in the future), and at what time the transaction is actually to take place. Moreover, they discuss the structure of the transaction (whether it is an asset purchase, an equity purchase, or a merger) and any purchase-price adjustments in this section of the contract.

2. Representations of the parties (Allocating the Risk): Both the sellers and the buyers make certain “representations and warranties” in these agreements. These consist of factual statements, and if they’re untrue or misleading, they could support a legal or contractual claim. As such, they have a risk allocation mechanism. The extent of each party’s representations will depend upon its bargaining power. Sellers with highly desirable businesses and other options may be able to insist on streamlined representations, whereas buyers paying a premium or purchasing or investing in a struggling business may secure more extensive representations.

Sellers’ Representations: Sellers' representations primarily concern contractual and fundamental business matters and generally include corporate authority, compliance with law, the existence and validity of material contracts, the accuracy of financial statements, etc. A seller’s representation serves several purposes: 

• Diligence: Buyers generally look for comprehensive seller representations to supplement their own diligence and to identify areas that might require additional inquiry.

• Termination Mechanism: If, after the purchase agreement, the buyer realises that any of the seller’s representations were untrue, then the buyer may have the right to terminate the agreement.

• Indemnification and allocation of economic risk: If a buyer finds that there were certain inconsistencies in the representations made by the seller after the transaction, then the seller may be required to indemnify or reimburse the buyer for the costs or losses that occurred.

• Breach of Contract Remedy: Moreover, the buyer can also exercise their right to damages as a result of the seller’s untruthful representations.

On the other hand, the Buyer’s representations are significantly more limited than those of the seller, usually focusing on the buyer’s authority to enter into the agreements and to pay the purchase price.

3. Covenants: The agreement may include covenants reiterating the seller’s obligation not to make material changes to the business before closing, such as incurring new debts or obligations, or issuing additional shares, without the buyer’s approval.

There are two types of covenants: pre-closing and post-closing. Pre-closing contracts generally include non-Shop provisions that broadly prohibit the seller from offering, encouraging, or negotiating alternative proposals with potential buyers. Post-closing covenants generally include non-competition clauses (regarding geography, duration, and scope), non-solicitation of employees, tax matters, continued confidentiality, and other provisions. These are all covenants applicable to the seller.

On the other hand, buyer’s covenants are usually limited to the requirement that the buyer will pursue all required consents and approvals and, if applicable, will use their best efforts to obtain financing. 

4. Closing Conditions: Conditions that must be met for the transaction to be completed. If a condition required by the buyer is not met, the buyer need not proceed with the transaction; similarly, if a seller’s closing condition is not met, the seller has no obligation to carry on with the sale. Thus, they provide for regulatory approvals, third-party consents or other requirements that must be met before the deal is finalised.

5. Termination Events: While general contract law principles allow a party to terminate an agreement upon a material breach, acquisition agreements generally specify the circumstances under which termination may occur to provide greater clarity. This allows parties to exit the agreement with little to no hassle. Moreover, the agreement may be terminated by mutual consent of the parties, whether expressly stated or not. 

Usually, an agreement can be terminated in the following scenarios: by mutual consent; by one party if the other party is in breach; after the “drop-dead” date; because of failure to obtain regulatory approval, etc.

6. Indemnification: The scope of indemnification applies in case of inaccuracies in representations made, breaches of convenances, fraud, or specific ratified or assumed liabilities. Thus, they provide a remedy for losses arising from breaches of representations or covenants, which is usually the most intensively negotiated aspect of acquisition agreements. Indemnification clauses can vary depending on how long they survive after closing, which breaches trigger indemnification, limits on the extent of damages, etc.

Thus, if an acquisition agreement is well-structured and balanced, it mitigates financial and legal risks for the buyer and enhances transactional clarity and operational control.

Drafting Tips and Negotiation Strategies

Drafting an acquisition agreement is not an easy task, and it goes through several rounds of talks and negotiations because of a conflict of interest between the seller’s desire to avoid liability and the buyer’s desire to be protected in the event of breaches. To ensure that an acquisition agreement is well-structured, a few steps can be followed: 

Firstly, the negotiation process can be strengthened. To ensure you have the upper hand in negotiations, designate dedicated negotiators. Once this is done, there is greater efficiency, since they’ve been at the deal from the very start and understand the subtle nuances of what favours which party. Moreover, preparing a structured strategy based on what you want to achieve from the negotiation will give you a clear understanding of what you need to secure from the deal. 

Next, it is also important to anchor a clear letter of intent, prioritising core sections such as purchase price, representations, covenants and indemnification, and the indefeasible reservation price and non-negotiable terms, so that you can walk away from deals with unrealistic expectations. 

Secondly, it is always better to have the upper hand by drafting the document more effectively. Usually, drafting the first document sets the baseline and tone, giving the drafting party an advantage. It is also important to avoid ambiguity by avoiding vague terms such as “reasonable price” or “reasonable efforts”. Clearly laying out the timelines ensures objectivity and protection. 

Conclusion

In conclusion, an acquisition agreement is designed to avoid confusion and ambiguity. From the initial facts disclosed in the representations and warranties to the purchase price adjustments, every clause seeks to minimise risk. Thus, for both legal professionals and those involved in the deal, the goal is to craft with precision, negotiate with a clear understanding of market data, and structure clauses to ensure both parties reach a successful close. By understanding the core provisions behind such an agreement, buyers can protect their investment, and sellers can exit the deal when it is unjust.

Author: Samiksha Pai, in case of any queries please contact/write back to us via email to chhavi@khuranaandkhurana.com or at  Khurana & Khurana, Advocates and IP Attorney.

References

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3. Acquisition Agreement, Umbrex, https://umbrex.com/resources/private-equity-glossary/acquisition-agreement/ (last visited June 15, 2026).

4. Latham & Watkins LLP, Key Provisions of Oil and Gas Purchase and Sale Agreements, Gen. Concepts Part II (2021), https://www.lw.com/admin/Upload/Documents/OilAndGasMandA/General%20Concepts/Consolidated_General_Concepts_Part_II_Key_Provisions.pdf.

5. Alexander J. Ryan & J.A. Glaccum, A Guide to Key Provisions in Acquisition Agreements, Lexology (Oct. 24, 2023), https://www.lexology.com/library/detail.aspx?g=9be8a013-19c2-46da-907e-974a678916d8.

6. Mergers and Acquisitions Key Terms, 1984 Ventures: Founders' Handbook, https://1984.vc/docs/founders-handbook/mergers-and-acquisitions/terms (last visited June 15, 2026).