Chapter 10: The purchase agreement when selling a business — warranties and liability
The purchase agreement when selling a business: price and payment, warranties, limitation of liability, non-compete and conditions — the seller’s view.
7 min readUpdated
The purchase agreement is the legally binding document that governs the deal. It builds on the letter of intent and the results of due diligence and sets out precisely what is being sold, what it costs, when it is handed over, and who bears the risk for what — also long after completion. This is where a poorly negotiated term can cost you money for years. So always have a lawyer review the agreement before you sign.
Sitavo has templates for both types of deal: purchase agreement for an asset sale and purchase agreement for a share sale. The templates are a good starting point and a checklist of what needs to be decided — but they do not replace advice, particularly for larger or more complex deals.
The purchase agreement in a deal on Sitavo
- Sitavo’s agreements — free: If you choose “Use Sitavo’s agreements” in the listing, the purchase agreement, asset list and transfer declaration are filled in automatically with the deal’s details when the deal starts. There is no charge for either of you.
- Your own documents: If you have an agreement from your lawyer, you can add it as a PDF or from “My documents”. Buyers see the list on the listing, and the buyer must open and accept each document in the deal before the agreement can be confirmed.
- Extended purchase agreement: With the Plus deal package (DKK 3,295) you get an extended purchase agreement with optional clauses on instalments, earn-out, non-compete, transition period, a warranty on key figures and retention. See Listing packages and add-ons.
- Loan agreement: If the buyer pays part of the price in instalments, you can create a loan agreement in the deal with a down payment, interest and repayments that you both accept.
- Acceptance with evidence: The acceptance is stored with the time, name, IP address, browser and a fingerprint (SHA-256) of the exact text. It is not a MitID signature.
The main content of the agreement
| Provision | What it governs |
|---|---|
| Parties and subject of the sale | Who is trading, and precisely what is being sold (list of assets or number of shares) |
| Purchase price and payment | Price, price adjustment, payment dates, vendor loan, earn-out, escrow |
| Completion date | When the risk and the operation pass to the buyer |
| Conditions | What must be met before completion (financing, consents, permits) |
| Seller’s warranties | The seller’s statements about the state of the business |
| Liability and limitation of liability | How and how much the buyer can claim if a warranty does not hold |
| Non-compete clause | What the seller may not do after the deal |
| Employees | Transfer of staff, holiday pay, pensions |
| Handover assistance | The seller’s involvement after completion |
| Confidentiality, disputes, governing law | How disagreements are resolved |
Price and price adjustment
The price can be agreed as a fixed price or with an adjustment mechanism. With a fixed price (“locked box”), the starting point is a balance sheet on a specific date, and the seller guarantees that no value has been extracted since. With price adjustment, items such as net debt, cash and working capital are calculated on the completion date, and the price is adjusted up or down. For smaller deals, it is common to agree a fixed price for goodwill and operating assets plus a separate settlement for inventory after a stock count.
- Make sure the agreement states precisely how the inventory is counted and valued, and who takes part in the count.
- Agree how customer prepayments, work in progress and receivables are handled.
- Agree who is to pay accrued holiday pay and other obligations towards employees up to the completion date.
- Agree how ongoing expenses such as rent, insurance and subscriptions are apportioned (accruals).
Warranties
The warranties are the seller’s statements that certain matters are in order — for example that the financial statements give a true and fair view, that there are no pending disputes, that the assets are free of charges, and that taxes have been paid. If a warranty does not hold, the buyer can claim compensation. The buyer will typically want as many and as broad warranties as possible; you want the opposite.
- Limit the warranties to what you know. Use wording such as “to the best of the seller’s knowledge” for matters you cannot have full knowledge of.
- Exclude disclosed matters. What has been disclosed in the data room or in the schedules to the purchase agreement should not be able to form the basis of a claim.
- Be precise. A warranty that “all agreements have been complied with” is very broad — can it be limited to material agreements?
- Put a time limit on them. Agree how long the buyer can bring claims.
Limitation of liability
The limitation of liability is one of the most important provisions for the seller, because it determines how large your risk is after the deal. Typical elements are:
| Element | Meaning |
|---|---|
| Cap | The maximum total amount the seller can be liable for — often a proportion of the purchase price |
| De minimis threshold | Claims below a certain amount cannot be brought individually |
| Aggregate threshold (basket) | Claims can only be brought once together they exceed a certain amount |
| Claims period | How long the buyer can bring claims after completion |
| Exceptions | The limitations often do not apply in cases of fraud or gross negligence, and special terms may be agreed for matters such as tax |
The levels are a matter for negotiation and depend on the size of the deal, the risk and the parties’ bargaining strength. Your lawyer can advise on what is customary for a deal of your type and size.
Escrow and insurance
The buyer may require part of the purchase price to be placed in escrow for a period as security for any claims. Larger deals also use warranty and indemnity insurance (W&I insurance), where an insurance policy covers breaches of the warranties instead of the seller. Consider what suits your deal. Escrow is agreed between the parties, typically with a lawyer or a bank. Sitavo does not handle the purchase price, but in the deal you can give the escrow holder as the recipient, so the buyer pays there and you confirm once the amount has been released to you. See Paying for a business.
The non-compete clause
The buyer is paying for goodwill — customers, relationships and market position. That is why the buyer will almost always require that you do not start a competing business, hire the employees or contact the customers for a period after the sale. That is reasonable, but the clause must be limited so that it does not unnecessarily restrict your future.
- Duration: How many years does it apply? Longer periods require a stronger justification.
- Geography: Does it apply to the whole country, a region or only the area in which the business actually operates?
- Activity: Which activities are covered? Precise wording is better than “any form of competing business”.
- Customer and employee clause: Are you barred from contacting the customers or hiring the employees?
- Consequences: Is there an agreed penalty for a breach?
Non-compete clauses in connection with the sale of a business are assessed under different rules from clauses in employment relationships, and competition law may also limit how far-reaching they can be. If you are employed by the business after the sale, special rules may apply to clauses in the employment contract. Have your lawyer assess the wording.
Conditions and completion
The purchase agreement is often signed before completion, because there are conditions that must be met first — for example the bank’s final approval, the landlord’s consent or a new licence. In the period between signing and completion, you must run the business as normal and typically may not make major decisions without the buyer’s approval. Make sure the agreement sets a final deadline for meeting the conditions, so you are not left in indefinite limbo.
Before you sign
- The lawyer has reviewed the agreement, and the accountant has assessed tax and VAT.
- The list of assets or the transfer of shares is precisely described.
- Price, payment and any adjustment are clearly worded.
- The warranties are limited and exclude disclosed matters.
- Limitation of liability with a cap, thresholds and deadlines has been agreed.
- The non-compete clause is reasonable in time, geography and activity.
- Conditions and the final deadline for completion have been set.
- The scope of handover assistance and any payment for it are described.
- Security for the vendor loan and earn-out is in place.
- The bank’s release of charges and personal guarantees is coordinated with the payment.
Frequently asked questions
At a minimum: the parties and exactly what is being sold, the price and payment, the takeover date, conditions, the seller’s warranties, liability and its limitation, a non-compete clause, employee matters, handover assistance, and confidentiality, governing law and dispute resolution.
It determines how much the buyer can claim from you if a warranty turns out to be untrue. A cap, a minimum per claim, an overall threshold and a deadline for claims are typical. The limitations often do not apply in cases of fraud or gross negligence.
It depends on the deal. The clause must be reasonable in duration, geography and activity and proportionate to the goodwill the buyer is paying for. Clauses in a business sale are assessed under different rules from those in employment, so have your lawyer review the wording.
Sitavo’s agreements are a good starting point and are filled in with the deal’s details, but they do not replace advice. For larger deals, share deals and physical businesses with a lease and employees, a lawyer should review the agreement before you accept it.
No. The acceptance on Sitavo is an electronic acceptance documented with the time, name, IP address, browser and a fingerprint of the exact text. It is not a MitID signature. If you want a MitID signature, you can sign the agreement outside Sitavo, for example through your lawyer.
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Related articles
- Chapter 9: Due diligence from the seller’s sideDue diligence from the seller’s side: build the data room, answer the buyer’s questions quickly and precisely, and handle findings so the deal moves on.
- Chapter 11: Handing over the business and the time afterHanding over a business in practice: telling employees, customers and suppliers, handover support, an asset checklist and life after the sale.
- The deal process step by stepFrom accepted offer to completed deal: letter of intent, agreement and documents, payment directly between you, handover, deadlines and proof of purchase.
- Earn-outs: how contingent consideration worksAn earn-out makes part of the price depend on results after the sale. Structure, an example, pitfalls and the Danish tax points to settle first.