What Does Sales and Purchase Agreement Mean?
A sales and purchase agreement (SPA) is a legal contract that obligates a buyer to buy and a seller to sell a product or service. SPAs are found in all types of businesses but are most often associated with real estate deals as a way of finalizing the interests of both parties before closing the deal.
Understanding Sales and Purchase Agreements
An SPA serves as a basis for a transaction to take place, providing a framework for how the transaction will proceed, what is included in the transaction and, if necessary, what is excluded from the sale. It allows the buyer and seller of a particular asset to negotiate, and ultimately agree upon, a proper price. While not required for every transaction, SPAs are often used for large single purchases or frequent purchases across a specified amount of time.
Not only do SPAs dictate the terms of the sale, but they also contain detailed information about the buyer and the seller. They serve as a record of any deposits made as negotiations move forward, any portions of the agreement that have already been met or transactions that have already been completed, as well as an official record of when the final sale is to take place.
Examples of Sales and Purchase Agreements in the Marketplace
One of the most common SPAs occurs during real estate transactions. As part of the negotiation process, a final sales price is agreed upon by both parties. Additionally, other items relevant to the transaction, such as a closing date or contingencies, are also included.
Sales and purchase agreements are also found in the upper supply chains of many large, publicly traded companies. An SPA may be used when obtaining a large quantity of materials from a supplier. This may include large-scale single purchases, such as 1,000 widgets, that will all be delivered simultaneously. An SPA may also function as a contract for revolving purchases, such as a monthly delivery of 100 widgets, purchased on a monthly basis over the course of a year. The purchase/selling price can be set in advance even if the delivery is set at a later date or spread out over time. SPAs are set up to help suppliers and purchasers forecast demand and costs, so they become increasingly important as the size of the deals increases.
In a larger example, an SPA is often required during a transaction where one business is acquiring another. Similar to a real estate transaction, these documents specify the exact nature of what is being bought and sold. This may allow a business to sell its tangible assets to a buyer without selling the naming rights associated with the business.