Plain-English guide · free
Purchase & Sale Agreement: Red Flags to Check First
A purchase and sale agreement sounds simple: one side sells something, the other side pays for it. But the document that formalizes this can quietly shift risk, cost, or control onto whichever party has less leverage — often the smaller business or individual buyer.
This guide walks through what these agreements actually cover, the clauses that deserve extra scrutiny, and the red flags that show up again and again — whether you're buying inventory, equipment, real property, or an entire business.
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Get your free review →What is a Purchase & Sale Agreement?
A purchase and sale agreement (sometimes called a sales agreement, purchase agreement, or asset purchase agreement) is a contract where one party agrees to sell something — goods, equipment, real estate, intellectual property, or a whole business — and the other agrees to pay a set price for it. It spells out what's being transferred, when, for how much, and under what conditions. You'll encounter one any time a transaction is big enough, unusual enough, or risky enough that a handshake or invoice isn't sufficient — buying a used piece of commercial equipment, acquiring a competitor's assets, or purchasing real property are all common examples.
What's actually being sold
The single most important section is the description of what you're buying or selling. Vague descriptions cause more disputes than almost anything else. If you're buying a business, does the agreement list which assets are included — equipment, inventory, contracts, customer lists, intellectual property — and which are excluded? If you're buying goods, are quantity, condition, and specifications spelled out precisely?
Ambiguity here isn't neutral. It tends to favor whoever drafted the agreement, because they can argue the vague language meant what's convenient for them after the fact.
Price, payment terms, and adjustments
Beyond the headline price, look at how and when payment happens. Is it a lump sum, installments, or tied to milestones? Are there price adjustment mechanisms — for example, adjustments based on inventory counts, accounts receivable, or working capital at closing? These adjustment clauses can move the final price significantly after the fact, and they're often written in dense formulas that are easy to skim past.
Also check what happens if payment is late or a check bounces — some agreements include escalating penalties or immediate default triggers that seem disproportionate to a minor delay.
Representations, warranties, and disclosure
A seller typically makes 'representations and warranties' — statements of fact about the condition of what's being sold, the seller's legal right to sell it, and the absence of hidden problems (liens, litigation, undisclosed liabilities). The buyer relies on these being true. If they turn out to be false, the buyer usually has a right to some remedy.
The scope of these promises matters enormously. A narrow set of warranties (limited to 'we own it free and clear') protects the seller. A broad set (covering financial condition, compliance with laws, pending disputes, environmental issues) protects the buyer. Whichever side you're on, check whether the warranties actually cover the risks you care about.
Indemnification and liability caps
Indemnification is the mechanism that makes warranties meaningful — it's the promise that if a representation turns out to be false and causes losses, the responsible party will cover them. Look closely at three things: how long the indemnification obligation lasts (the 'survival period'), whether there's a cap on the total amount owed, and whether there's a minimum threshold of losses before a claim can even be made.
A short survival period (say, a few months) can let real problems surface only after the window to claim has closed. An uncapped indemnity, on the other hand, can expose a seller to open-ended liability well beyond the sale price.
Conditions to closing and termination rights
Most agreements list conditions that must be satisfied before the deal actually closes — financing approval, regulatory clearance, inspection results, or third-party consents. Check who controls whether a condition is satisfied and what happens if it isn't. Some agreements give one party broad discretion to walk away, while the other is locked in regardless.
Also check the termination and deposit provisions. If the deal falls through, who keeps any deposit or earnest money, and under what circumstances? These provisions determine how much financial exposure you carry if the transaction doesn't close.
Red flags to watch for
Uncapped or unlimited indemnification obligations
Without a cap, a party found to have breached even a minor representation could be on the hook for damages far exceeding the price paid — sometimes without limit.
Vague or incomplete description of what's included
If the list of assets, goods, or property isn't precise, disputes after signing often get resolved in favor of whoever wrote the contract, not whoever assumed something was included.
Very short survival period for representations and warranties
If claims must be made within a few weeks or months of closing, problems that surface later — like a hidden defect or undisclosed liability — may be legally impossible to pursue, even if they're real.
One-sided conditions to closing
If only one party can walk away easily (broad 'material adverse change' language, discretionary approval rights) while the other is locked in, that asymmetry can be used as leverage to renegotiate at the last minute.
Non-refundable deposit with no clear return conditions
If the deposit is forfeited for almost any reason the seller can point to, buyers can lose real money even when the deal collapses through no fault of their own.
Broad 'as-is' language paired with narrow warranties
Combining a disclaimer of nearly all condition-related promises with minimal seller warranties can leave a buyer with almost no recourse if something turns out to be broken, encumbered, or misrepresented.
No clear allocation of risk of loss before closing
If the goods or property are damaged, lost, or destroyed between signing and closing, the agreement should say who bears that risk. Silence on this point creates real uncertainty.
Overly broad non-compete or restrictive covenants (business sales)
Sellers of a business are sometimes asked to accept non-compete terms that are unreasonably long, geographically broad, or vague — restricting their ability to earn a living well beyond what's needed to protect the buyer's investment.
What to look for before you sign
- Confirm the description of what's being sold is specific — itemized, quantified, and unambiguous.
- Check the total price, payment schedule, and any price adjustment formulas.
- Read every representation and warranty and ask: does this actually cover the risks I care about?
- Find the survival period for warranties and indemnification — is it long enough for problems to realistically surface?
- Look for a cap (or lack of one) on indemnification liability, and any minimum threshold for claims.
- Identify every condition to closing and who controls whether it's satisfied.
- Check what happens to any deposit or earnest money if the deal doesn't close, and why.
- Confirm who bears risk of loss or damage between signing and closing.
- If a business is being sold, review any non-compete, non-solicitation, or confidentiality terms for reasonableness.
- Check for a dispute resolution clause — does it require arbitration, and where would disputes be handled?
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Review your contract free →Frequently asked questions
What's the difference between a purchase agreement and a sales agreement?
In practice, the terms are often used interchangeably. Some people use 'sales agreement' for simpler goods transactions and 'purchase agreement' for larger or more complex deals like real estate or business acquisitions, but there's no strict rule — read the actual terms rather than relying on the title.
Can I negotiate a purchase and sale agreement, or is it usually final?
Most purchase and sale agreements are negotiable, especially on price, warranties, indemnification caps, and closing conditions. The party that drafted the agreement often built in room to negotiate — don't assume the first draft is the final word.
What happens if the seller lied about something in the agreement?
If a seller's representation turns out to be false, the buyer's remedy typically depends on what the indemnification and warranty sections say — including whether the survival period has passed and whether any cap limits recovery. This is exactly why those sections matter so much before signing, not after.
Do I need a lawyer to review a purchase and sale agreement?
For small, low-value goods transactions, many people proceed without one. For higher-value purchases — real estate, business acquisitions, or anything with significant indemnification or ongoing obligations — having someone review the terms before signing is generally a good idea, since these documents are hard to unwind once signed.
What does 'as-is' actually mean in a purchase agreement?
'As-is' generally means the buyer accepts the condition of what they're buying without relying on additional promises from the seller about its condition. It doesn't necessarily eliminate all seller obligations, but it significantly narrows what a buyer can complain about later.
Key takeaways
- A purchase and sale agreement's value depends heavily on precise descriptions, clear price terms, and well-scoped warranties — vague language tends to favor the drafter.
- Indemnification caps and survival periods determine how much real protection the warranties provide; short windows or no caps change the risk balance dramatically.
- Closing conditions and deposit terms often reveal who has the real leverage to walk away from a deal.
- Red flags cluster around unlimited liability, one-sided closing conditions, and narrow 'as-is' protections paired with weak warranties.
- These agreements are usually negotiable — reviewing and questioning key clauses before signing is far easier than disputing them afterward.
More guides
This guide is general information to help you understand a common type of contract — it is not legal adviceand doesn’t cover your specific situation or local laws. For a high-stakes contract, consult a lawyer.