Heads of agreement when buying a business

What it usually records

Business Queensland says a letter of intent sets out the proposed terms and conditions of the purchase and plans the timing of the sale. It can include a lock-out or exclusivity period to help negotiations.¹ It should state whether the offer is subject to a trial, finance or a satisfactory lease.¹

In a business sale, the terms worth getting onto one page early are:

• The price and how it is paid.
• What is included: the assets, the stock, the lease, the name.
• The conditions that must be met before the sale goes ahead, such as finance, due diligence and the landlord agreeing to assign the lease.
• Training and handover after settlement.
• A restraint on the seller starting a competing business.
• The deposit, and when it is returned.
• The settlement date.

Business.gov.au lists the sale price, payment method, handover, restraint clauses and any conditions both sides must meet as things a business sale agreement sets out.² Its section on negotiating the sale lists the deposit amount (usually 10% of the sale price) among the things to agree.² A heads of agreement is where you agree them in outline. The contract is where they become exact.

Is a heads of agreement legally binding?

Do not assume either way from the name on the document. Business Queensland says a letter of intent should be non-binding, and says a letter of offer, the next step, is a legally binding document that sets out the final price, terms and conditions of sale.¹

So read the wording, not the title, and ask your lawyer what it means. You may want most of the document to be an outline of a deal still to be negotiated, and a few clauses to bind from the day it is signed: confidentiality, exclusivity (the seller will not negotiate with anyone else for a set period) and who pays the costs. Ask your lawyer to say plainly, in the document itself, which clauses bind and which do not. A sentence such as "this clause is binding" next to each one removes the guesswork.

Heads of agreement or contract of sale

The two do different jobs.

• The heads of agreement records the deal in principle, so both sides can test whether they are really agreed before paying for a full contract.
• The contract of sale is the full, legally binding agreement. Business.gov.au says a business sale agreement is a legally binding contract between buyer and seller.²

Business Queensland sets out the order: a letter of intent, then a letter of offer, then a purchase contract drafted with your advisers once the offer is accepted.¹ It adds that all purchase contracts include conditions for both seller and buyer.¹ Business Queensland's page is Queensland's guide. If the business is in another state, ask your lawyer what applies there.

Before you sign one

• Have your own lawyer read it. Business.gov.au suggests getting a legal professional to draw up the sale contract, and Business Queensland says to consult your advisers before signing any agreement.²¹
• Do not pay a deposit you cannot get back unless you know the conditions it depends on. If finance, due diligence or the lease fails, the document should say what happens to the money.
• Do not treat it as a reason to skip checking the business. Business.gov.au says to gather as much information as you can on the business before you sign the contract.³ See due diligence when buying a business.
• Make the conditions match your plan. If you need a loan, say the offer is subject to finance; see finance to buy a business. If the seller is lending part of the price, see vendor finance.
• Be careful with exclusivity. A lock-out period stops the seller talking to other buyers, which suits you, but check the clause does not tie you to the deal for longer than your checks need.

If a broker is handling the sale, ask them for their template and send it to your lawyer; see choosing a business broker. For what the final contract has to cover, see what goes in a business sale contract. Signetry lists businesses for sale. It is not a party to any sale and does not draft or hold these documents.