When buying or selling a business in Australia, one of the most important early documents in the process is the Heads of Agreement (HoA). This document outlines the key terms agreed in principle between the buyer and the seller before the formal sale contract is drawn up.
While typically not legally binding in full, a well-drafted Heads of Agreement can help prevent misunderstandings, set expectations, and fast-track the drafting of final legal contracts. However, business owners must tread carefully. Certain clauses can be binding, and poor wording may lead to unintended legal consequences.
The NBO (also called an indicative offer or expression of interest) is usually the first written step in a potential business acquisition.
The HoA typically occurs after receiving multiple Non-Binding Offers (NBOs) from prospective buyers, selecting one of those buyers to proceed with a HoA.
The HoA comes after both parties have agreed in principle to key terms and want to proceed toward a formal contract. It's more detailed and may include some binding clauses.
A Heads of Agreement is a preliminary document that records the essential terms agreed between parties in a business sale transaction. It is usually signed before due diligence begins and prior to the preparation of a formal sale of business agreement.
In Australia, a Heads of Agreement may also be referred to as a "term sheet" or "memorandum of understanding". It is used to:
According to LegalVision and the Law Institute of Victoria, the enforceability of the HoA depends heavily on the language used and the intention of the parties. If certain terms are clearly expressed as binding (e.g. confidentiality or exclusivity), they may be legally enforceable even if the remainder of the document is not.
While every Heads of Agreement is different, most will cover the following elements:
The document should also clearly specify which sections are intended to be binding and which are not. Legal practitioners often include a clause stating that the HoA is "subject to contract" to reinforce its non-binding status on the commercial terms.
This is one of the most misunderstood aspects of a Heads of Agreement. While the overall document may not be binding, certain provisions may be enforceable if not carefully worded.
Typically Binding Terms:
Typically Non-Binding Terms:
It's crucial to state clearly which terms are binding, using phrases like "legally binding" or "non-binding expression of intention" for clarity. A solicitor experienced in business transactions should review the draft before it's signed.
Signing a Heads of Agreement provides a commercial and psychological commitment to the deal. It also allows both parties to:
From a buyer's perspective, securing exclusivity early in the process prevents the seller from negotiating with multiple parties. For sellers, it shows the buyer is serious and helps protect sensitive business information under confidentiality provisions.
Heads of Agreement documents are increasingly standard in Australian business sales, especially when brokers are involved. However, like any legal document, they must be tailored to the specific deal and carefully reviewed to avoid costly pitfalls.
A Heads of Agreement is a valuable tool in the business sale process, but it must be approached with caution. Getting the structure and wording right at the start can save time, protect your interests, and lead to a smoother and more successful sale transaction.
Disclaimer: This article is general information only and does not constitute legal advice. For tailored guidance, consult a qualified Australian commercial lawyer.
