Heads of Agreement in Business Sales

Whilst it is best practice to have a buyer and seller of a business enter into a substantive business sale contract to ensure their rights and obligations are properly defined, in some situations it is necessary to enter into a Heads of Agreement (HOA) first.

The HOA is particularly relevant in New South Wales and Victoria where business brokers are prohibited from completing standard from contracts or drafting special conditions for business sales. Therefore, parties to business sales are normally encouraged by business brokers to enter into the HOA as an act of good faith and to show a commitment to the sale.

When parties enter into a HOA, they generally do not intend for it to be binding. It is normally stated not to be binding and “subject to contract”. Many of the essential terms are yet to be agreed, or at least to a point that creates certainty and completeness.

A deposit can also be sought from a buyer, particularly when the seller agrees to an exclusivity period to allow a buyer to conduct due diligence and negotiate the terms of the substantive contract through the solicitors.

However, whilst not common, there may be circumstances where the parties do require the HOA to be binding on the parties. If this is the case, the HOA must be drafted in such a way to ensure that the document is binding.  In particular:

• it should be specifically stated that the HOA is intended to be binding on the parties;
• the parties details should be accurately reflected;
• the agreement should be dated and properly executed by the parties;
• all the essential terms should be dealt with; and
• a clause should be inserted to the effect that if any final details cannot be agreed, they will be determined by reference to an expert or arbitrator or some other unambiguous mechanism.