What Is a Purchase Agreement? Types and Components

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You don’t need to worry much about legal protections when you’re buying a tube of toothpaste or a bag of chips. But when you’re buying or selling something of immense value—whether that’s a house, a car, a year of consulting services, or an entire dental practice—you’ll need a contract that protects both the buyer and seller.

These contracts are called purchase agreements. They spell out exactly what’s being sold (real property, intellectual property, merchandise, or services), the purchase price, and the conditions that must be met before the sale closes. Whether you’re drafting your first agreement or reviewing one a seller prepared, understanding these contracts helps you protect your interests.

This guide walks you through the four main types of purchase agreements, what to include in each, and how these contracts differ from simpler documents like purchase orders.

What is a purchase agreement?

A purchase agreement is a legally binding agreement between a buyer and a seller that formalizes the terms and conditions of a sale. It includes all agreed-upon terms, including the total purchase price, payment schedule (e.g., down payment plus monthly installments), and any applicable warranties or insurance requirements.

You may encounter a purchase agreement under a different name. Sometimes it’s called a sales and purchase agreement, a purchase and sale agreement, a sales contract, or a purchase contract. Regardless of the name, this legally binding agreement will always include an agreed-upon purchase price and a clear delineation of what both the buyer and seller must do once the deal closes.

Purchase agreement vs. purchase order

Both purchase agreements and purchase orders play a role in the sale of goods and services, but they serve different purposes.

A purchase order (PO) is a commercial document that a buyer sends to a seller. It is an offer to purchase goods or services. It specifies the type, quantity, and agreed-upon price of the products. A purchase order alone isn’t a legal contract.

Purchase agreements, by contrast, are legally binding. They’re reserved for complicated transactions, such as the sale of a business or a real estate purchase. A purchase agreement includes all the terms of a PO, plus additional legal protections: contingencies, dispute resolution procedures, and a final closing date for the sale. 

Think of a PO as the initial request to buy, and the purchase agreement as the final contract that seals the deal.

Types of purchase agreements

1. Real estate
2. Business
3. Large asset
4. Services

A purchase agreement’s content depends upon what you are buying or selling. For instance, agreements accompanying real estate transactions might include clauses about a seller’s existing mortgage or dues to a homeowners association. But those items wouldn’t apply to the sale of a family law practice from one attorney to another. Here are four of the most common types of purchase agreements.

1. Real estate

A real estate purchase agreement, or real estate purchase contract, is a legally binding contract for the sale of real property, whether residential property (like a condominium) or commercial property (like a warehouse). Many terms in real estate purchase agreements are standardized by state laws, but a real estate agent might negotiate the final details, draft the agreement, and walk both parties through its terms.

Beyond establishing a sales price and closing costs, these agreements protect buyers from undisclosed issues and sellers from liability after closing. Common contingencies include requiring a successful home inspection and title report, or the buyer securing a mortgage, before the sale can close.

2. Business

This type of purchase agreement applies when a buyer pays to acquire some or all of an existing business. A binding legal document, this purchase agreement can be structured as an asset purchase or a stock purchase, depending on how the seller wishes to divest their ownership stake.

If you’re selling your business, your purchase agreement should include provisions for transferring tangible assets (e.g., inventory or equipment), intangible assets (e.g., brand, goodwill, or intellectual property), and transferring liabilities. You might also include a non-compete clause to prevent the seller from immediately starting a competing business.

Purchase agreements can be relatively streamlined for small businesses with simple operations and minimal assets. But when major corporations are involved, back-and-forth negotiations can stretch for years before both parties agree on a specific price and relevant contingencies.

3. Large asset

The sale of high-value items beyond real estate—vehicles, boats, or heavy machinery—requires a large asset purchase agreement. It provides a legal record of the sale terms: the dollar amount, acceptable payment methods, contingencies, and the asset’s condition at purchase.

For example, if you were to sell a car, your purchase agreement might include the vehicle identification number (VIN), a clear statement of its condition (e.g., “as-is” or with a warranty), and a clear title transfer.

4. Services

A service agreement is a variation on a purchase agreement, common in freelance work, consulting, or any project-based field. Service agreements typically include a detailed scope of work, a payment schedule tied to project milestones, and clear terms for revisions or cancellation. This protects both parties from scope creep (where billable hours keep increasing) and ensures the service provider gets paid for their work. 

What to include in a purchase agreement

While it’s always a good idea to hire a professional legal writer to draft a purchase agreement that protects both parties and holds up in arbitration, this purchase agreement template includes all the necessary components:

• Buyer and seller information. Include the legal names of both parties (e.g., individuals, LLCs, or corporations), their contact details, and business registration numbers if applicable. In some cases, a seller may need to provide a statement of their legal capacity to enter into the agreement.

• Asset description. Thoroughly describe the item, property, business, or service being purchased. Include serial numbers, a legal description (for real estate), or the scope of services. If warranties are a condition of the sale, note them here.

• Price and conditions. State the agreed-upon purchase price, payment structure (e.g., down payment, deposit, installments, or lump sum), and any contingencies (e.g., escrow or loan approval from a financial institution). Some real estate transactions require the buyer to make an earnest money deposit (or good faith deposit) into escrow to prove their intent to purchase.

• Due diligence. Include rights and timelines for property inspections, business audits, or asset condition checks. Business sales often require access to financial records, contracts, or operational data (for business sales).

• Disclosures. The seller discloses any known defects, liabilities, risks, environmental hazards, or zoning restrictions. Sellers must fully explain all disclosures—which are enforceable by criminal law—to buyers before a sale.

• Covenants and conditions prior to close. Cover the obligations both parties must fulfill before final closing (e.g., clearing liens, securing financing, obtaining permits, or purchasing title insurance). In a business sale, this is where non-compete or confidentiality agreements go.

• Closing details. This covers the location and process of transfer once the sale price is paid—often via escrow for real estate, businesses, or high-value merchandise.

• Termination clauses. Legal contracts frequently include specific conditions under which either party can exit the agreement. For example, in a home sale, an inspection may turn up structural issues, or the buyer may learn that the seller’s mortgage went unpaid.

• Governing laws and jurisdictions. Include any applicable local, state, and national laws that might impact the sale. These laws might come from the locality where the sale takes place, or the locality where either buyer or seller has their legal primary residence.

• Indemnification. This part of the contract outlines who bears responsibility for specific risks or claims.

• Dispute resolution. Include mediation, arbitration, or court litigation procedures. These mechanisms can help resolve disputes between the buyer and seller after the deal has closed, or if one party’s actions have prevented the deal from closing.

• Signatures. At the end of the agreement, create a section that collects the signatures of all parties (with a witness or notary if required) and the date of execution. If someone is signing on behalf of a business entity, this section may include corporate seals or another signifier of authority.

• Purchase agreement addendum. A purchase agreement addendum sometimes follows the signature section with additional information about the sale, such as an itemized list of all merchandise changing hands.