Purchase Agreement: The Contract That Sets the Terms of the Sale

The binding agreement between buyer and seller that sets the terms of the sale.

Why it matters: How this document fits into the deal timeline differs by size. Larger transactions are often preceded by a Letter of Intent (LOI) — sometimes preceded by an Indication of Interest (IOI) — with due diligence happening after the LOI is signed; that means the gap between a fully executed purchase agreement and closing can be short. Smaller deals skip the IOI/LOI step, so the purchase agreement itself covers the due diligence period, and closing can take weeks to months depending on complexity, the number of advisors involved, and whether third-party financing is part of the deal. For a Main Street seller, this means the purchase agreement isn't the finish line — it's closer to the starting gun for due diligence. Signing it feels like a milestone, and it is one, but the deal can still fall apart afterward if due diligence turns up problems, financing falls through, or either side gets cold feet before closing conditions are met. Understanding what triggers a walk-away right (and what doesn't) before signing avoids a lot of stress in the weeks that follow.

Example (illustrative only): A seller signs a purchase agreement for a $2.2M business with a $50K earnest money deposit, a 30-day due diligence period, and an SBA-financing contingency. The buyer's lender takes 45 days instead of 30 to finalize underwriting, pushing closing back — a common, non-fatal wrinkle, but one the seller should expect rather than be alarmed by, since the purchase agreement's financing contingency language anticipated exactly this kind of delay.

Earnest money deposits are typical on smaller deals; larger deals (financial buyers pursuing businesses with roughly $1M+ adjusted EBITDA) typically skip earnest money and use the IOI/LOI/purchase agreement sequence instead. An asset purchase uses an asset purchase agreement; a stock purchase uses a stock purchase agreement — business brokers typically provide the former, M&A attorneys the latter.

Related terms: Due Diligence, Due Diligence Release, Bill of Sale, Closing Statement