TEXAS BUSINESS LAW
Business Purchase Agreement: Key Terms (Texas)
The purchase agreement is the document that actually transfers a business, and it does far more than state a price — it allocates risk between buyer and seller through representations, warranties, and indemnification. The terms that decide who bears the cost of a problem discovered after closing matter as much as the headline number. This guide walks the core components of a Texas business purchase agreement and where buyer and seller interests diverge in each. It builds on your chosen valuation and deal structure.
A signed letter of intent usually precedes the agreement, fixing the basic terms; the purchase agreement is where those terms become binding and detailed.
The Core Components
| Term | What it does | Where the tension is |
|---|---|---|
| Purchase price & structure | The amount, and whether it’s an asset or stock deal | Asset vs stock changes tax and which liabilities transfer |
| Price allocation | How the price is assigned across assets (asset deals) | Affects each side’s taxes; must be consistent on IRS Form 8594 |
| Representations & warranties | Factual promises about the business | Buyer wants broad; seller wants narrow and qualified |
| Covenants | Promises about conduct before and after closing | Operating the business normally until close; transition help |
| Indemnification | Who pays if a rep is wrong or a liability surfaces | Caps, baskets/deductibles, and survival periods |
| Closing conditions | What must be true to close | Consents, financing, no material adverse change |
Representations, Warranties, and Indemnification
These three terms are the heart of the agreement. Representations and warranties are the seller’s factual statements — that the financials are accurate, taxes are paid, contracts are valid, there’s no undisclosed litigation. Indemnification is the remedy if one proves false: the seller agrees to compensate the buyer for resulting losses. The negotiation lives in the limits:
- Survival period — how long the reps last after closing (often 12–24 months for general reps, longer for tax and fundamental reps).
- Cap — the maximum the seller can be required to pay, frequently a percentage of the purchase price.
- Basket/deductible — a threshold of losses the buyer absorbs before indemnification kicks in, so small claims don’t trigger it.
Buyers push for broad reps, long survival, and high caps; sellers push the other way. Where you land defines your real exposure long after the money changes hands.
Escrow, Holdbacks, and the Texas Tax Point
A portion of the price is often held in escrow (a holdback) to fund potential indemnification claims for a set period. In Texas, escrow also does double duty: it’s the mechanism for the tax-clearance holdback under Tax Code §111.020, where the buyer withholds funds until the seller delivers a Comptroller certificate of no tax due. Building both purposes into the escrow terms keeps the deal clean.
The Non-Compete and Other Protections
A buyer paying for goodwill will require the seller to sign a non-compete — and under Texas law a non-compete tied to the sale of a business is generally enforceable when its time, geographic, and scope limits are reasonable. Related protections include non-solicitation of employees and customers, confidentiality, and a transition-services or training commitment from the seller. These clauses protect the value the buyer is paying for; their scope is negotiable but should be reasonable to hold up.
Frequently Asked Questions
What are the most important terms in a business purchase agreement?
Price and deal structure, the representations and warranties, and the indemnification provisions that decide who pays if something is wrong after closing — along with closing conditions, escrow, and the seller’s non-compete.
What is the difference between representations and indemnification?
Representations and warranties are the seller’s factual statements about the business. Indemnification is the contractual remedy that requires the seller to compensate the buyer for losses if one of those statements turns out to be untrue.
What is an indemnification cap and basket?
A cap is the maximum a seller can be required to pay on indemnification claims, often a percentage of the price. A basket (or deductible) is the threshold of losses the buyer absorbs first, so minor issues don’t trigger a claim. Both are heavily negotiated.
Are non-competes enforceable in a Texas business sale?
Generally yes. Texas enforces non-competes connected to the sale of a business when the time, geographic area, and scope of restricted activity are reasonable and tied to protecting the goodwill the buyer purchased.
The purchase agreement is where a fair price can still become a bad deal through risk allocation. Reidel Law Firm drafts and negotiates business purchase agreements for Texas buyers and sellers on a flat fee. Get help with your purchase agreement.
