What Is Purchase Agreement? | Agency M&A Definition
A purchase agreement is the legally binding contract that finalizes the sale of a business, spelling out exactly what is being bought, the price, how it will be paid, and the obligations of both buyer and seller. In agency M&A, this document governs everything from which client contracts transfer to how outstanding invoices are handled. It is the single most important document in any agency transaction.
Purchase Agreement in Agency M&A
When selling a marketing agency, the purchase agreement is where months of negotiation become legally enforceable commitments. Unlike transactions involving physical assets, agency deals hinge on intangible value — client relationships, team talent, brand reputation, and proprietary processes. The purchase agreement must address each of these carefully. For example, it will specify whether client contracts are formally assigned or whether the buyer assumes them through a novation process, which can require individual client consent. The agreement also defines the treatment of work-in-progress: if your agency has $150,000 in unbilled project work at closing, who collects that revenue? Seller-friendly agreements allow the seller to retain WIP collections, while buyers often push to include them in the transferred assets. Employment terms for key staff are frequently appended as schedules to the purchase agreement, ensuring creative directors or account leads remain post-close. Agencies with retainer-based revenue models tend to see cleaner purchase agreements because recurring revenue is easier to define and transfer than project-based billings.
How Purchase Agreement Affects Agency Valuation
The purchase agreement directly shapes how much a seller actually receives versus the headline price. Deal structure provisions — such as the split between cash at closing, seller notes, and earnout components — live in this document. A $3 million deal might deliver only $2 million at closing, with $500,000 in a seller note paid over two years and $500,000 tied to an earnout. Working capital adjustments written into the agreement can swing the final price by 5-10% in either direction. Indemnification caps, typically set at 10-20% of the purchase price for agency deals, limit the seller’s post-closing financial exposure. Sellers who negotiate favorable purchase agreement terms — shorter indemnification periods, higher basket thresholds, and tighter earnout definitions — consistently retain more of the deal’s total value.
Example
A digital marketing agency with $2.8 million in revenue and $560,000 in adjusted EBITDA agrees to a sale at 5.5x EBITDA, or $3.08 million. The purchase agreement structures the deal as $2.15 million cash at closing (70%), a $308,000 seller note at 5% interest paid over 24 months, a $462,000 earnout tied to 90% client retention over 12 months, and $154,000 held in escrow for 18 months to cover potential indemnification claims. The agreement also includes a working capital peg of $185,000, meaning the seller must deliver at least that amount in net current assets at closing or face a dollar-for-dollar price reduction.
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