This article is Part 3 of a series of blogs focusing on three pre-business sale documents:
- Part 3: Heads of Agreement.
We have also developed a library of resources that will help clarify your thinking about selling your business and get you on the right track. Selling your business may not be something you do every day, but we do. Call us now on 1300 654 590 or email us to discuss how ADLV Law can help you realise the value within your business and guide you through the various stages of the sale process.
Selling a business, especially one that you or your family have built over time, is a big deal. We suggest you begin by reading our article: 9 Questions to Ask Yourself Before You Sell Your Business to make sure you know what you are hoping to achieve. In answering those 9 questions, you will be able to develop a Heads of Agreement that reflects the transaction you wish to enter into.
What is a Heads of Agreement? Once you’ve identified serious buyers, exchanged NDAs, and moved beyond preliminary discussions, the next milestone is often the signing of a Heads of Agreement (HoA), also known as a Non-Binding Offer, or Term Sheet. While largely non-binding, this document outlines the key commercial terms and expectations that will form the basis for the final sale agreement.
This article explores how to use an HoA to establish clarity and momentum in your sale process, without locking yourself into unfavourable terms too early. It also considers how to structure exclusivity, maintain competitive tension, and filter serious buyers from speculative ones.
Purpose of a Heads of Agreement; Does the Deal Make Sense?
A well-drafted HoA provides clarity around the commercial terms of the transaction, aligns expectations regarding due diligence and contract negotiation, and tests the buyer’s level of commitment. It acts as a useful framework before entering into a binding agreement, giving both parties the chance to flag major issues or walk away with minimal cost. Working through a HoA with your legal advisor will help you ensure the deal makes sense.
When is a HoA Used?
An HoA is typically introduced once a shortlist of potential buyers has been developed, based on responses to a teaser, initial information memorandum, and expressions of interest. At this point, qualified buyers may be provided with additional disclosures, including a draft sale agreement and a due diligence index. These materials are intended to help the buyer submit a well-informed Non-Binding Offer that reflects their valuation and any key conditions they propose.
The HoA allows the seller to assess whether the buyer understands the business and is prepared to engage on realistic terms. It also enables the seller to compare proposed deal structures, identify legal red flags early, and decide which party to progress with.
Key Clauses to Include
A comprehensive HoA should address the identity of the parties, what is being sold, and the proposed price. It should set out any conditions precedent, such as regulatory approvals, finance, or board consents. Payment terms, whether upfront, deferred, or contingent on future performance, should be clearly described. Importantly, the HoA must include a clause confirming which parts are binding, typically confidentiality and costs, and which are not.
Where exclusivity is offered, the HoA should limit its duration and link it to milestones. The timeline for due diligence and contract finalisation should be realistic but firm, and the HoA should clarify how costs are to be handled, especially if the seller agrees to reimburse bid costs in some cases.
Filtering Buyer Commitment
The HoA process is a valuable filter. By asking a prospective buyer to submit a marked-up version of the draft sale agreement, outline their assumptions, and nominate a bid price, you gain insight into their approach, readiness, and seriousness. Buyers who invest effort at this stage are far more likely to proceed in good faith. In contrast, those who ignore your requests or delay engagement often signal weaker interest or capacity.
A buyer’s response to the HoA process also gives you valuable leverage. Their willingness to comply with your process creates emotional and financial investment, which improves your negotiating position. Even if they are the only serious bidder, maintaining discipline around timelines and required responses protects your position.
Exclusivity: Proceed with Caution
Buyers often seek exclusivity before incurring the cost of full due diligence. While this signals genuine interest, granting exclusivity too early can significantly reduce your bargaining power. Once other bidders are excluded, competitive tension is lost. If you do agree to exclusivity, it should be for a short, defined period, and contingent on the buyer meeting agreed milestones. This way, you retain the option to re-open discussions with other parties if momentum stalls.
One way to balance buyer concerns is to offer partial reimbursement of bid costs for unsuccessful bidders who comply with the sale process. This can encourage participation without granting exclusivity too early. It’s a small investment to preserve control over the deal.
Special Considerations for Family-Owned Businesses
For family-owned businesses, the HoA stage is a key opportunity to ensure all family stakeholders are aligned. This may involve confirming who will exit, who may stay involved, and how inter-company loans or shared assets will be treated. It is also the time to discuss and document any expectations around brand legacy, retained land, or employment continuity.
Where family dynamics are involved, it is often wise to hold a formal board meeting or family council session before signing the HoA. Internal disputes after signing, even on a non-binding document, can derail momentum and scare off buyers.
Beware of Side Agreements
It is critical that all key commercial terms, understandings, and commitments, whether discussed verbally or over email, are properly documented in the HoA or the final Sale Contract. Making informal or ‘side’ agreements that sit outside these documents is dangerous. Not only are these agreements typically unenforceable, but they can also lead to disputes, misunderstandings, or even legal claims once the sale is complete. If a term is important enough to agree on, it is important enough to record. Buyers and sellers alike should resist pressure to leave matters to ‘a handshake’ or ‘trust’, particularly in transactions involving family members or ongoing relationships post-sale.
How We Can Help
The HoA is not just a legal checklist; it’s a strategic tool. Done well; it sets the tone for the rest of the transaction, ensures clarity, and helps you identify serious buyers before you invest heavily in negotiations or disclosure. At ADLV Law, we assist sellers in crafting an HoA that is not only clear and protective, but commercially astute and tailored to the nature of the buyer and the business. Begin the deal on your terms and let the HoA do the heavy lifting before the stakes get higher. Call us on 1300 654 590 or email us to speak with one of our trusted advisers.
The information contained in this post is current at the date of editing – 24 July 2025.
