What Is a Stock Purchase Agreement? The 2026 Founder’s Guide to SPAs

“An SPA transfers the company as a unit — assets, liabilities, contracts, history, and risks. That simplicity is the seller’s advantage and the buyer’s exposure. Understanding which side wins each negotiation point is where most of the deal value moves.”

Key Takeaways

• An SPA transfers ownership of company equity (stock or LLC interests) — the company itself is unchanged.
• Buyer inherits all assets, liabilities, contracts, and obligations of the acquired entity.
• Sellers usually prefer SPAs for tax simplicity; buyers usually prefer APAs for liability protection.
• Negotiation focus: indemnification (since the buyer carries all historical risk), reps & warranties, and disclosure schedules.
• Section 338(h)(10) election can deliver APA-like tax step-up while keeping SPA-like operational continuity.
• R&W insurance is especially common in SPAs — it shifts unknown historical risk off both parties.
• Negotiation typically 3-5 weeks; SPA document length 60-100 pages with disclosure schedules.

What a Stock Purchase Agreement Does (And Why Structure Matters)

A Stock Purchase Agreement transfers ownership of equity — the buyer becomes the owner of the company itself. The entity continues uninterrupted. Every contract the company has signed, every asset it owns, every liability it owes, every employee it employs, and every customer relationship it carries — all of it stays with the company. Only the ownership changes.

This continuity is the SPA’s defining feature. Customers don’t need notification. Suppliers don’t need consent. Licenses don’t need reissuance. Employees don’t need new hire paperwork (their employment continues uninterrupted). For businesses where contractual or licensing continuity is mission-critical, SPAs are often the only viable structure.

The flip side: the buyer inherits everything. The lawsuit no one disclosed. The IRS audit that surfaces next year. The supplier dispute simmering in correspondence. The patent infringement claim that lands two years post-close. The SPA structure makes the buyer the legal successor to all of it.

SPA vs APA: The Core Differences

Understanding when each structure makes sense requires seeing the trade-offs across multiple dimensions.

Why Sellers Often Prefer a Stock Purchase Agreement

For sellers — especially C corp sellers — SPAs typically deliver three meaningful advantages:

1. Single Layer of Tax

When a C corp owner sells stock, they pay only one level of tax: long-term capital gains on the stock-sale gain (currently 20% federal + state). Compare to an asset sale, where the corporation first pays tax on the gain, then the shareholder pays again on distribution — combined effective rates often 35-50%.

The single-tax advantage can be worth 10-20% of the purchase price in net proceeds for C corp sellers.

2. Clean Exit

When the SPA closes, the seller is done. They’ve sold their equity. No leftover corporate shell to wind down, no further tax returns to file for the entity, no post-close legal obligations beyond reps and indemnification.

3. All Liabilities Transfer

The buyer takes the business as it is. Known liabilities (debt, customer disputes, employee claims) and unknown ones (latent product defects, future tax audits, undiscovered IP infringements) all become the buyer’s problem.

Why Buyers Resist SPAs (And When They Accept)

Buyers’ core concern with SPAs is unknown liability exposure. They’re inheriting everything the company has ever done — including things the seller may not even know about. Reps and warranties, indemnification, and R&W insurance are the tools that mitigate this exposure.

Despite the risk, buyers accept SPA structure in several common scenarios:

• Key contracts have anti-assignment clauses — assigning them in an APA would trigger termination
• The business holds licenses (medical, financial, broadcasting) that take months to reissue
• Customer relationships are deeply embedded in entity continuity
• Tax basis step-up is achievable via 338(h)(10) election while maintaining SPA structure
• R&W insurance can absorb most of the unknown-liability risk
• Seller is willing to accept higher escrow and longer survival periods to compensate

The Section 338(h)(10) Election: Best of Both Worlds

The 338(h)(10) election is a federal tax mechanism that allows a stock purchase to be treated as an asset purchase for tax purposes. The transaction is documented as an SPA (so operationally it’s a stock sale with full continuity), but for tax purposes both parties treat it as if assets had been sold.

Available for: S corporations and certain corporate subsidiaries (when the subsidiary is sold by its corporate parent and the parent and subsidiary file a consolidated return).

The result: the buyer gets a stepped-up basis in the company’s assets (like an APA), and the seller pays tax on a deemed asset sale (which for an S corp shareholder typically passes through cleanly). Both parties get most of what they want.

338(h)(10) elections add complexity and require both parties to consent. They’re more common in deals above $20M where the tax benefit is substantial enough to justify the negotiation effort.

Core Sections of Every Stock Purchase Agreement

While every SPA is customized, virtually all LMM SPAs contain the same set of core sections:

1. Purchase Price & Adjustments

The headline price (in cash or stock), working-capital adjustment, escrow, and any earnout. SPAs in C corp situations often involve more straightforward cash payments because tax treatment is simpler.

2. Equity Transferred

Description of the shares or LLC interests being transferred — class, number, percentage, certificates. Includes any required equity rollover by the seller.

3. Representations and Warranties

Statements about the company and its business. SPAs typically have more extensive reps than APAs because the buyer is taking everything. Standard reps include: title to equity, authority, no conflicts, compliance with laws, financial statements, taxes, IP, employees, contracts, customers, environmental.

4. Disclosure Schedules

Schedules attached to the SPA listing exceptions, qualifications, and known issues that ‘carve out’ from the reps. Negotiating these schedules is the single most time-consuming part of SPA drafting.

5. Covenants

Promises about behavior between signing and closing (interim operating covenants) and after closing (non-compete, non-solicit, transition assistance).

6. Closing Conditions

Conditions to closing: required consents (less than in an APA but still some), regulatory approvals (HSR, FTC if applicable), no material adverse change.

7. Indemnification

The mechanism for recovering losses from rep breaches or covenant violations. Caps, baskets, survival periods, and process. Critical in SPAs because buyer is exposed to all historical risks.

8. Tax Matters

Pre-closing tax indemnification, allocation of straddle-period taxes, treatment of 338(h)(10) election, transfer tax responsibility, tax sharing for any post-close audits.

9. Termination

Rights to terminate the agreement before closing — drop-dead dates, mutual termination, breach termination, MAC termination.

10. Miscellaneous

Governing law, venue, dispute resolution, expense allocation, broker fees, confidentiality, public announcements.

Reps and Warranties: Why They Matter More in SPAs

In an APA, reps and warranties matter — but the buyer also has the protection of choosing which liabilities to assume. In an SPA, reps and warranties are the only protection against unknown liabilities. The buyer is taking everything, so the reps need to cover everything.

Common SPA-specific reps include:

• Title to shares: seller owns the equity free and clear
• Capitalization: complete and accurate share register, no undisclosed options or warrants
• Subsidiaries: complete list of all subsidiaries and ownership
• Financial statements: GAAP-compliant, fairly present financial position
• Undisclosed liabilities: no material liabilities outside what’s disclosed
• Litigation: no pending or threatened actions outside disclosure
• Taxes: all returns filed, all taxes paid, no audits pending
• Compliance with laws: company has complied with applicable laws
• Customer relationships: list of top customers and material relationships
• Material contracts: complete list, all in good standing
• IP ownership: company owns or has rights to all IP used in business
• Employee matters: no labor disputes, no undisclosed benefit obligations
• Environmental: no known contamination or violations
• Insurance: maintained and disclosed

Indemnification in a Stock Purchase Agreement: The Heart of Negotiation

Because the buyer takes all historical liability in an SPA, indemnification provisions are the central negotiation.

R&W Insurance in SPAs

R&W insurance is particularly common in SPAs because it shifts unknown-historical-liability risk to a third party. For deals above $20M, expect to see R&W insurance with 2-4% premium and 0.5-1% retention. Allows lower escrow and faster seller payout.

Disclosure Schedules: Where Reality Gets Mapped

Disclosure schedules are appendices to the SPA that list specific items that ‘qualify’ the seller’s reps. If a rep says ‘no pending litigation,’ the disclosure schedule lists any pending litigation — making the rep accurate as qualified.

Drafting disclosure schedules requires meticulous review of the business: every lawsuit, every contract, every customer, every employee claim, every regulatory inquiry. Forgetting something can create indemnification exposure.

Disclosure schedule prep typically takes 2-4 weeks and involves close collaboration between sellers, their counsel, and key employees who have specific knowledge of the business.

SPA Timeline: From LOI to Close

A typical LMM SPA workflow:

1. Week 0: LOI signed
2. Weeks 1-4: Buyer diligence (financial, legal, operational); seller assembles data room
3. Week 2-3: Buyer’s counsel delivers first SPA draft
4. Weeks 3-6: Sellers and counsel mark up draft; multiple redline rounds
5. Weeks 4-7: Disclosure schedule preparation in parallel with redlines
6. Week 7-8: Final terms locked; closing conditions checked
7. Week 8-10: Sign and close (often simultaneous in LMM deals)

Common Stock Purchase Agreement Negotiation Pitfalls

Patterns that cost founders real money:

• Accepting broad ‘undisclosed liabilities’ reps without carving out ordinary course liabilities
• Letting ‘Knowledge’ definitions go un-negotiated — they affect rep accuracy
• Not pushing for tipping basket (rather than deductible) on indemnification
• Failing to negotiate fundamental rep caps separately from general caps
• Vague material adverse change definitions that let buyer walk on minor changes
• Allowing unlimited survival on certain reps when statute of limitations would suffice
• Not negotiating R&W insurance allocation (premium and retention)
• Skipping the 338(h)(10) analysis when election would shift hundreds of thousands in tax

When to Use an SPA vs APA

Use an SPA when: seller is a C corp where double-tax penalty is punitive; key contracts can’t be reassigned; the business holds licenses that don’t easily transfer; customer relationships depend on entity continuity; R&W insurance is feasible.

Use an APA when: buyer needs maximum liability protection; tax basis step-up materially improves buyer economics; seller is an LLC or S corp where pass-through limits double-tax concern; the assets are clearly definable separate from corporate baggage.

Use a 338(h)(10) election when: SPA structure is needed for operational continuity AND tax basis step-up materially matters for buyer — available for S corps and certain corporate subsidiaries.

Conclusion

Frequently Asked Questions

What is a Stock Purchase Agreement?

A Stock Purchase Agreement (SPA) is the contract documenting an M&A transaction where the buyer purchases the equity (stock or LLC interests) of the target company. The company continues uninterrupted; only ownership changes.

What’s the difference between an SPA and an APA?

An SPA transfers ownership of company equity — buyer inherits all assets, liabilities, contracts, and history. An APA transfers specified assets and assumed liabilities only — buyer chooses what to take. SPAs are simpler for sellers, riskier for buyers.

Why do sellers prefer Stock Purchase Agreements?

Three reasons: (1) cleaner tax treatment — single layer of capital gains for C corps; (2) clean exit — no leftover corporate shell to wind down; (3) all liabilities transfer to the buyer, including unknown ones.

Why do buyers resist SPAs?

Buyers inherit all of the target company’s known and unknown liabilities — lawsuits, tax audits, contract disputes, IP claims, environmental issues. SPAs require buyers to underwrite historical risk they didn’t create.

What’s a 338(h)(10) election?

A federal tax election that allows a stock purchase (SPA) to be treated as an asset purchase for tax purposes. The buyer gets a stepped-up basis (like an APA), while the parties maintain SPA structure for operational continuity. Available for S corps and certain corporate subsidiaries.

How long does SPA negotiation take?

Typically 3-5 weeks of focused legal work, with the full deal timeline from LOI to close running 8-10 weeks. SPAs are generally shorter to negotiate than APAs because no detailed asset schedule is required.

What’s a typical SPA length?

60-100 pages including disclosure schedules. The main body is usually 40-60 pages; disclosure schedules add another 20-40 pages with detailed business information.

What are reps and warranties in an SPA?

Statements of fact about the company and its business that, if false, give the buyer an indemnification claim. SPAs typically have more extensive reps than APAs because the buyer is taking everything (known and unknown).

What’s a typical indemnification cap in an SPA?

For general reps and warranties, 10-15% of purchase price. For fundamental reps (title, taxes, capitalization), often 100% of price or uncapped. R&W insurance can replace traditional escrow in deals above $20M.

Do contracts need to be reassigned in an SPA?

Usually not, because the company itself continues uninterrupted. However, some contracts have ‘change of control’ clauses that may be triggered by an SPA — those need consent from counterparties.

What’s the role of R&W insurance in SPAs?

R&W insurance is particularly common in SPAs because it shifts unknown-historical-liability risk from buyer/seller to a third-party insurer. Typical 2-4% premium, 0.5-1% retention. Allows lower escrow and faster seller payout.

What are disclosure schedules?

Disclosure schedules are appendices to the SPA listing specific items that qualify the seller’s reps. They map the actual state of the business — pending litigation, key customer concentration, material contracts, employee claims — making reps accurate as qualified.