A heads of agreement is a short document — typically 3 to 10 pages — that records the main commercial terms you and a buyer have agreed on before the full sale contract is drafted. In Australian business sales, it sits between the indicative offer and the formal sale and purchase agreement. It’s not a contract. Think of it as the commercial handshake, written down, before the lawyers start charging by the hour on the detailed stuff.
If you’re selling an Australian business worth anywhere between $1 million and $20 million, you will almost certainly be asked to sign a heads of agreement (sometimes called a “HOA,” a “term sheet,” or “heads of terms”). Understanding what you’re signing — and what you’re actually agreeing to — is one of the more important things you can do before you enter due diligence.
Here’s what you need to know.
What a Heads of Agreement Actually Does
The HOA serves two purposes that don’t always get equal attention.
The first is obvious: it creates a written record of the commercial terms both parties have agreed on. Price. Structure. Timeline. This prevents the buyer from re-trading the deal — quietly renegotiating terms you thought were settled — once you’re deep into due diligence and have little leverage left. A well-drafted HOA gives you something to point to.
The second purpose is less obvious but often more consequential: it makes certain obligations legally binding immediately. The most common are confidentiality and exclusivity. The buyer doesn’t want you sharing their offer with competitors. You want to know they’re committed while they investigate your business. Both of those are reasonable — but how they’re drafted matters more than most sellers realise.
The rest of the HOA (price, conditions, timeline) is typically non-binding on either party. That distinction deserves more attention than it usually gets.
What Should Be in It
A well-drafted heads of agreement for an Australian business sale should cover at minimum:
Purchase price and structure. The number, and whether the deal is structured as an asset sale or a share sale. These two things have materially different tax implications for both parties. An asset sale at $5 million and a share sale at $5 million are not the same transaction, even if the headline figure is identical.
Payment terms. Is the full price paid on completion? Is there a deposit paid on signing or on entering due diligence? Is there an earn-out — where part of the price is paid over time based on future business performance? If there’s an earn-out, the HOA should capture the basic mechanics upfront, not just note that one “may” apply.
Due diligence period. How long the buyer has to investigate the business before proceeding. Four to six weeks is the norm for a business in the $1 million to $10 million range; larger or more complex transactions sometimes run to eight weeks. If a buyer requests twelve weeks without a clear reason, it’s worth asking why.
Exclusivity. During due diligence, you agree not to engage with other buyers. This is almost always included and almost always binding (more on this below — it’s the clause that gets sellers into the most trouble).
Confidentiality. Both parties agree not to disclose the existence of the deal or its terms. Standard, and almost always binding.
Conditions precedent. The specific things that must happen before the deal can complete: landlord consent, key contract assignments, regulatory approvals, finance approval. If conditions precedent aren’t satisfied by the completion date, the deal doesn’t proceed.
Target completion date. When settlement is expected to occur after due diligence and formal contracts are signed.
Governing law. The jurisdiction whose laws govern the agreement — typically the state where the business operates. For a Perth-based business, that’s Western Australia.
Binding vs Non-Binding: The Part Most Sellers Miss
Most HOAs are described in their first paragraph as “non-binding,” and most sellers read that and assume they haven’t committed to anything. That’s not quite right.
The overall document might be non-binding, but the HOA almost always carves out specific clauses that are explicitly stated to be legally enforceable. Confidentiality nearly always is. Exclusivity nearly always is. Sometimes costs (who pays legal fees if the deal falls over) and dispute resolution are also binding.
The practical implication: you could be bound to exclusivity and confidentiality on a deal you haven’t formally committed to. If you later decide not to proceed — or the buyer dramatically changes the terms — those obligations may still apply.
Before you sign, read the binding clause list carefully. Better yet, have a commercial lawyer read it for you. The cost is trivial at the deal sizes we’re talking about.
The Exclusivity Clause: Read This Part Twice
A business owner I worked with in Perth — industrial services, around $8 million in revenue — signed a six-week exclusivity clause in a heads of agreement with a private equity group in 2024. The buyer spent the first four weeks of the due diligence period requesting documents, running site visits, and asking questions. In week five, they came back with a revised offer 18% below the original price, citing “issues identified during due diligence.” The seller had no alternatives at that point. The exclusivity clause had worked perfectly — for the buyer.
The lesson is not to avoid exclusivity altogether. Buyers won’t proceed without it, and that’s legitimate. The lesson is to understand what the exclusivity clause actually obliges each party to do. In most standard Australian HOAs, exclusivity obliges you to stop talking to other buyers. It doesn’t oblige the buyer to do much at all except proceed with due diligence. They can walk away at the end, revise their offer dramatically, or simply run out the clock — and you’ve spent several weeks locked out of the market.
Some protections worth negotiating:
- Cap the exclusivity period at four to six weeks, with extensions only by written agreement
- Include a “best endeavours” or “reasonable endeavours” obligation on the buyer to complete due diligence within the period
- Specify that if the buyer re-trades the price by more than a defined percentage without substantiated diligence findings, exclusivity terminates
- Consider including a break fee payable by the buyer if they withdraw without genuine cause
None of these are unusual to ask for. A buyer who refuses all of them is telling you something useful about how they’ll behave later.
Conditions Precedent: The Things That Have to Happen First
Conditions precedent (CPs) are the specific events that must occur before the deal can complete. Common ones in Australian business sales include:
- Landlord consent — assignment or re-grant of the commercial lease to the buyer
- Contract novation — key supplier or customer contracts transferred to the buyer’s name
- Regulatory approvals — ACCC clearance for larger deals, franchisor consent for franchise businesses, licensing transfers for regulated industries
- Key employee agreements — particularly in professional services businesses where the buyer is paying for people as much as profit
- Finance approval — the buyer’s lender signing off on the acquisition loan
The HOA should specify a deadline for each CP, and what happens if the deadline isn’t met: is there an automatic extension? Can either party terminate? Is a deposit refundable if a CP fails?
“Subject to finance” is a standard condition, but make sure it includes a hard deadline and a clear termination right if the buyer’s finance doesn’t come through. An open-ended finance condition effectively gives the buyer a free option to walk away on their own timeline while you remain off the market.
How the HOA Fits in the Sale Process
The M&A process for an Australian SME typically runs: business preparation → information memorandum → buyer outreach → indicative offers → shortlist → heads of agreement → due diligence → formal contracts → completion.
The HOA comes after you’ve selected a preferred buyer from the indicative offer stage — it’s the document that moves the process from “we’re interested” to “we’re proceeding.” It’s more detailed than an indicative offer (which might be a one-page letter) and less detailed than the formal sale contract (which will run to 50-100 pages and take weeks to draft).
You’ll often see a non-binding offer or “indicative offer” earlier in the process. The HOA is different: it’s negotiated, it’s more complete, and at least parts of it are legally binding.
What to Watch Out For as a Seller
Beyond exclusivity, the things that most often catch sellers out:
Vague due diligence scope. If the HOA doesn’t define what the buyer can look at, they can request information indefinitely. Specify “financial, legal, and operational due diligence over the records provided in the data room” rather than “full due diligence.” Scope creep during due diligence is both time-consuming and expensive.
Price adjustment mechanisms. The headline number in the HOA might be subject to working capital adjustments, debt adjustments, or normalisation of earnings that reduce what you actually receive at settlement. The working capital adjustment is worth understanding before you sign.
Non-solicitation of employees. Some buyers include a clause preventing you from approaching your own staff if the deal falls over. This is more aggressive than standard — if you agree to it, make it narrow in scope and short in duration.
Restraint of trade provisions. You’ll almost certainly be asked to agree to a non-compete after the sale. The HOA might include the broad outlines. Know what you’re agreeing to and for how long — three to five years is typical; eight years is not.
No deposit. A deposit gives you some protection if the buyer withdraws without good reason. It’s not universal, but for deals above $2 million, requesting a 5–10% deposit held in trust is reasonable. A buyer who is serious about the deal shouldn’t object.
Get Advice Before You Sign
A heads of agreement isn’t the formal contract — but it commits you to real obligations. Exclusivity, confidentiality, and potentially a break fee structure can all bind you from the moment you sign, regardless of what happens to the rest of the deal.
Have a commercial lawyer review the HOA before you sign. Have your accountant review the price mechanics and adjustment clauses. And if you’re working with a corporate advisor, this document should be going through them as part of the process.
If you’re at the stage of receiving offers and haven’t engaged an advisor yet, talk to us about what’s involved — it’s often the moment where independent guidance makes the biggest difference.