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M&A Guide · Deal Terms
Two offers with the same headline price can put very different amounts in the seller's pocket and leave the buyer with very different protection. This guide explains the terms that make the difference, in the order they usually appear in a small-business purchase agreement.
Read past the price
In most private acquisitions the purchase price in the letter of intent is a starting point. Adjustments for debt, cash and working capital, plus amounts held back or paid later, determine what changes hands at closing and afterwards.
Buyers and sellers who focus only on the headline figure often discover the gap at the closing table, when a payoff letter, a working capital shortfall or an escrow deduction reduces the wire. Understanding the vocabulary before the LOI is signed lets you compare offers on a like-for-like basis and negotiate the terms that actually move value.
The terms below are general descriptions. Each agreement defines them in its own way, and the definitions control. For the broader picture of buying and selling, start with the firm's M&A overview for buyers and sellers.
Quick reference
| Term | What it means | Why it matters |
|---|---|---|
| Cash-free, debt-free | Seller keeps its cash and pays off its debt; buyer receives the business without either | Debt payoffs come out of the seller's proceeds at closing |
| Working capital target (peg) | An agreed normal level of receivables, inventory and payables delivered with the business | Price goes up or down if actual closing working capital differs |
| Escrow | Part of the price held by a third party for a set period | Secures the buyer's indemnity claims; delays part of the seller's payment |
| Holdback | Part of the price retained by the buyer itself | Similar purpose to escrow, but the seller bears the buyer's credit risk |
| Representations and warranties | Statements of fact about the business made in the agreement | The basis for most post-closing claims |
| Basket | A threshold of losses before indemnity claims can be made | Screens out small claims; can be a deductible or a tipping basket |
| Cap | The maximum the seller can owe under the indemnity | Limits the seller's total exposure for ordinary breaches |
| Survival period | How long after closing claims for breach can be brought | Rights expire if not asserted in time |
Price mechanics
Buyers usually value a business on its earnings and then express the offer on a cash-free, debt-free basis, as if the company had no debt and no excess cash. Whether a buyer or seller, the negotiating priorities for the purchase agreement follow from these definitions. At closing, the seller's loans, equipment financing and similar obligations are paid from the price, and the seller keeps or distributes its cash. Which items count as debt is negotiated: deferred revenue, unpaid bonuses and accrued taxes are frequent points of disagreement.
The working capital peg protects the buyer from a seller who collects every receivable and delays every payable before closing. The parties agree a normal level, often based on a trailing average, and compare it with the actual closing figure. Because the final number is not known on closing day, the agreement usually provides for an estimate at closing and a true-up a few months later.
How valuation interacts with these adjustments is discussed in more depth on the page about business valuation in acquisitions.
Risk allocation
Indemnification is the contractual promise to compensate the other side for specified losses. Its limits are usually the most heavily negotiated part of the agreement.
Baskets
With a deductible, the seller pays only losses above the threshold. With a tipping basket, once losses exceed the threshold the seller pays from the first dollar. The difference matters a great deal on mid-sized claims.
Caps
General representations are usually capped at a negotiated fraction of the price. Fundamental representations, such as title to shares and authority to sell, and often taxes, are commonly capped at the full price or left uncapped.
Survival
General representations often survive for a limited period after closing, while fundamental and tax representations may survive longer. In New Jersey, contract claims are generally subject to a six-year limitations period, but parties frequently agree to shorter survival periods.
Exclusivity
Many agreements make indemnification the exclusive remedy for breach, with an exception for fraud. That makes the basket, cap and survival terms the practical limit of recovery.
Deferred and contingent price
These tools bridge gaps in value or financing. Each has its own page because each carries distinct risks.
Extra payments tied to post-closing performance. Useful when buyer and seller disagree on future results, but prone to disputes over measurement.
How earnouts are draftedThe seller finances part of the price and is repaid over time, often subordinated to the buyer's bank lender.
Seller financing termsEscrows, holdbacks, closing conditions and restrictive covenants used together to protect the buyer's investment.
Protections for buyersDeal-term questions
It means the price assumes the business is delivered with no borrowed money owed and no excess cash left in it. The seller's debts are paid off from the proceeds at closing, and the seller keeps its cash. The definitions of debt and cash are negotiated, so items such as customer deposits or accrued bonuses need careful attention.
It is the agreed normal level of working capital, broadly receivables and inventory less payables, that the business should have at closing. If actual closing working capital is above the peg, the buyer usually pays more; if below, the price drops. The peg and the accounting rules used to measure it should be fixed in the agreement.
A basket is a floor: losses must exceed it before the buyer can recover. A cap is a ceiling: the most the seller will ever pay under the indemnity. Together they define the band within which the seller bears risk for breached representations. Fundamental representations and fraud are often carved out of both.
Usually only for narrow categories such as fraud, title to what is being sold, and sometimes taxes. A general indemnity with no cap leaves the seller's entire proceeds, and possibly more, exposed for years. Sellers typically negotiate a cap tied to the price, a meaningful basket and a short survival period, and buyers seek escrow to make recovery practical.
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