What is a share purchase agreement (SPA)?
By SuLe · Updated 16 May 2026
A share purchase agreement (SPA) is the master contract that sells a company's shares — setting the price and how it is calculated, the warranties and indemnities the sellers give, the disclosure letter, restrictive covenants on the founders, and the completion mechanics. It is where the real risk between buyer and seller is allocated.
Key facts
- The SPA covers price and structure, warranties and indemnities, the disclosure letter, restrictive covenants, and completion mechanics.
- Price is usually fixed by completion accounts (adjusted after closing) or a locked box (fixed on a historical balance sheet).
- Warranty caps, baskets and time limits — the limits on seller liability — are heavily negotiated.
- The disclosure letter qualifies the warranties and is the sellers' main protection.
- Warranty and indemnity (W&I) insurance is common in bigger deals, shifting warranty claims to an insurer.
What is actually in an SPA?
Five building blocks. The price and its structure; the warranties and indemnities the sellers give about the company; the disclosure letter that qualifies those warranties; restrictive covenants stopping founders competing after the sale; and the completion mechanics that make it all happen.
Around those sit conditions to completion, and often deferred elements like an earn-out. The SPA is the document that turns an agreed deal into a binding, risk-allocated sale.
For founders, the warranties and their limits are usually the part with the most personal exposure — which is why they attract the most negotiation. [More: Share sale vs asset sale — what's the difference for founders?]
How is the price fixed — completion accounts or locked box?
Two mechanisms. Completion accounts finalise the price after closing: the company's actual position (cash, debt, working capital) is measured at completion and the price adjusted accordingly. It is accurate but can lead to post-completion disputes.
A locked box fixes the price on an agreed historical balance sheet, with no adjustment afterwards. Economic risk transfers to the buyer from that earlier "box" date, and the seller keeps value leakage in check through covenants.
Locked box is simpler and gives price certainty; completion accounts track the true position but keep the number open longer. Which suits you depends on the deal — and it is a genuine negotiation, not a formality.
What limits the sellers' liability?
Three tools, all heavily negotiated. A cap sets the maximum total a seller can be liable for under the warranties — often a percentage of the price rather than the full amount. A basket is a threshold: claims must exceed it before anything is payable, filtering out trivial ones.
Time limits set how long the buyer has to bring a claim — commonly shorter for general warranties and longer for tax. Together these define your real exposure after you have banked the proceeds.
Getting them right matters enormously, because an uncapped or long-tail warranty can pull back money you thought was safely yours. This is where a seller's solicitor earns their keep.
| Term | What it does | Seller wants |
|---|---|---|
| Cap | Maximum warranty liability | Lower cap (e.g. % of price) |
| Basket | Threshold before claims payable | Higher basket |
| Time limits | Window to bring claims | Shorter windows |
| Disclosure | Qualifies the warranties | Full, specific disclosure |
| W&I insurance | Shifts claims to an insurer | Clean exit from liability |
Why does the disclosure letter matter so much?
Because it is the sellers' shield. The warranties are promises about the company; the disclosure letter lists the exceptions. If you warrant there is no litigation but disclose a specific dispute, the buyer takes the shares knowing about it and cannot later claim on that point.
Good disclosure — specific, complete, well-documented — is the single best protection against warranty claims. Vague or incomplete disclosure leaves you exposed to exactly the risks you thought you had flagged.
The disclosure exercise is time-consuming and easy to rush under deal pressure, which is precisely why it deserves care. [More: What is a disclosure letter?]
What is W&I insurance?
Warranty and indemnity insurance lets the buyer claim against an insurer, rather than the sellers, if a warranty turns out to be wrong. It is common in larger deals.
For founders, the appeal is a cleaner exit: your liability is reduced or removed, and you are not left with proceeds hostage to warranty claims for years. The buyer keeps its protection, just from a different source.
It has costs — a premium and its own diligence requirements — so it suits bigger transactions where a clean break is worth paying for. On smaller deals, caps and baskets usually do the job.
Worked example
Oskar sells his cybersecurity company for £8m under an SPA. The price uses a locked box fixed on the last audited balance sheet, giving both sides certainty.
The warranties are capped at 50% of the price — £4m — with a basket of £25,000 so minor claims fall away, and general warranties time-limited to two years. Oskar's disclosure letter carefully flags a known customer dispute, so the buyer cannot later claim on it. He also signs restrictive covenants not to compete for a defined period.
On a smaller deal these caps and baskets would carry the risk allocation alone; here, because the value is meaningful, the parties also put W&I insurance in place, letting Oskar exit with less lingering liability while the buyer keeps its protection.
Where founders go wrong
Under-negotiating the warranty limits
— an uncapped or long-tail warranty can claw back proceeds you thought were safe; fight for the cap, basket and time limits.Rushing the disclosure letter
— vague disclosure leaves you exposed to the very risks you meant to flag; be specific and complete.Ignoring the price mechanism
— completion accounts and locked box allocate risk differently; understand which you are agreeing to.Overlooking restrictive covenants
— post-sale non-competes can limit what you do next; check their scope and duration before signing.
Related questions
What does a share purchase agreement cover?
The price and how it is calculated, the warranties and indemnities the sellers give, the disclosure letter, restrictive covenants on the founders, and the completion mechanics. It is the master contract that transfers the shares and allocates risk between buyer and seller.
What is the difference between completion accounts and locked box?
Two ways to fix the price. Completion accounts finalise the price after closing based on the company's actual position at completion. A locked box fixes the price on an agreed historical balance sheet, with no post-completion adjustment — simpler, but the risk transfers earlier.
What are warranty caps, baskets and time limits?
Limits on the sellers' exposure. A cap sets the maximum a seller can be liable for; a basket is a threshold that claims must exceed before any is payable; time limits set how long the buyer has to bring a claim. All three are heavily negotiated.
What is a disclosure letter?
The sellers' document that qualifies the warranties by disclosing known exceptions. If you warrant there is no litigation but disclose a specific dispute, you are not liable for that dispute. Good disclosure is the sellers' main protection against warranty claims. [More: What is a disclosure letter?]
What is W&I insurance?
Warranty and indemnity insurance covers warranty claims, so the buyer claims against an insurer rather than the sellers. It is common in bigger deals, letting founders walk away more cleanly while the buyer keeps warranty protection. It has its own cost and diligence requirements.
The SPA is where founders quietly take on personal liability through warranties — and the caps, baskets, disclosure and price mechanism decide how much of your proceeds are really safe. A SuLe solicitor can negotiate those limits and run the disclosure exercise so you keep what you sold for. Book a free consultation with a startup solicitor before you sign the SPA.
Keep reading: Share sale vs asset sale — what's the difference for founders? · What is an earn-out in an acquisition? · What is a disclosure letter? · What legal prep does a startup need before an exit? · What are warranties in an investment agreement? · How do liquidation preferences play out in an exit waterfall?
Primary sources: Companies Act 2006
