Heads of Agreement for a Business Sale: What to Check Before Signing

A heads of agreement for business sale can feel like a harmless stepping stone. It is often signed early, before the full sale contract is drafted, and many buyers and sellers treat it like a simple summary of the deal. That is where problems start.

Common mistakes include assuming the document is completely non-binding, leaving key deal terms vague, and relying on verbal promises that never make it onto the page. Another frequent issue is signing too quickly, then spending money on due diligence, finance or advisers before the commercial and legal basics are actually settled.

If you are buying or selling a business in Australia, the heads of agreement can shape the whole transaction. It can set the price framework, exclusivity period, deposit arrangements, conditions and timeline, and it can also create binding obligations even if the final business sale agreement is still to come. Here’s what this guide answers: what a heads of agreement really does, what legal points matter most before you sign, and where Australian businesses most often get caught.

Overview

A heads of agreement records the main commercial terms for a proposed business sale and sets the tone for the binding contract that usually follows. Even where the parties intend only part of it to be binding, the wording still matters because confidentiality, exclusivity, costs, deposits and dispute clauses can have immediate legal effect.

A well-drafted document helps both sides test whether they are aligned before spending more time and money. A vague or rushed document can create confusion, unnecessary leverage for one side, or arguments about what was actually agreed.

• Whether the heads of agreement is intended to be binding, non-binding, or only partly binding.
• How the purchase price is calculated, including stock, equipment, debtors, creditors and any post-completion adjustments.
• What exactly is being sold, such as assets, goodwill, business name, customer lists, intellectual property, plant and equipment, or shares in a company.
• Any conditions that must be satisfied before the sale proceeds, including finance, due diligence, landlord consent, franchisor approval or third party consents.
• Exclusivity terms, including how long the seller must stop negotiating with other buyers and what happens if the deal stalls.
• Confidentiality obligations, especially where sensitive financials, supplier information or customer data will be shared.
• Deposit arrangements, including when money is payable, who holds it, and when it is refundable or forfeited.
• Restraint clauses, handover obligations and any promises about transition support after completion.
• The proposed timetable for due diligence, contract negotiation, completion and staff or customer transition.
• How legal costs are handled if the deal does not proceed.

What Heads of Agreement for Business Sale Means For Australian Businesses

A heads of agreement is usually the first written record of the real deal, and in practice it often influences every later negotiation. Before you sign, treat it as more than a casual outline.

In Australian business sales, this document is often called a heads of agreement, term sheet, memorandum of understanding or letter of intent. The label does not decide its legal effect. Courts look at the wording, the structure of the document, and what the parties objectively intended.

That means a document described as non-binding can still contain binding promises. It might lock in confidentiality, exclusivity, access to records, deposit handling, or the process for future negotiations. In some cases, poor drafting can even create arguments that broader commercial terms were already binding.

Why parties use it

Buyers and sellers use a heads of agreement because it helps narrow the deal before paying for a full contract, due diligence reviews and specialist advice. It can also flush out major deal-breakers early, such as whether the buyer wants an asset sale or share sale, whether the seller will stay on for a handover period, and whether the lease can be assigned.

For small and medium businesses, that can be especially useful. Many deals begin with informal conversations and broad assumptions. A written heads of agreement forces both sides to be more precise before they spend money on accountants, lawyers and finance applications.

Asset sale or share sale

One of the biggest issues to identify early is the structure of the transaction. The commercial headline may sound the same, but the legal effect is very different.

• In an asset sale, the buyer purchases selected business assets and rights, such as equipment, stock, goodwill, intellectual property and customer contracts, rather than the company itself.
• In a share sale, the buyer acquires the shares in the company that owns the business, which usually means the company’s existing assets, liabilities and contracts stay where they are.

This choice affects risk, due diligence, employee transfer questions, third party consents and the final contract terms. It can also have accounting and tax implications, so the parties should speak with their accountant or tax adviser early.

What this document does not replace

A heads of agreement is not a substitute for a properly drafted business sale agreement. It does not remove the need for due diligence, clear warranties, indemnities, completion mechanics and transfer documents.

It also does not solve practical issues automatically. If the premises are leased, the landlord may still need to consent. If the business is a franchise, franchisor approval may be required. If licences or permits are involved, transfer rules need to be checked. If employees are staying on, their transition must be handled correctly.

The main point is simple: the heads of agreement should help the sale move forward, not create uncertainty that makes the final contract harder to negotiate.

Legal Issues To Check Before You Sign

The legal issues that matter most are the ones that affect price, risk and whether the deal can actually complete. Before you sign a contract, make sure the document is clear on those points.

Is it binding, partly binding, or non-binding?

This should be stated plainly, not implied. If only some clauses are intended to bind the parties immediately, the document should identify those clauses and say the rest are subject to a formal business sale agreement.

This is where founders often get caught. A buyer may think they can walk away freely, while the seller believes exclusivity, deposit terms and timing commitments are locked in. If the wording is muddy, both sides can end up arguing over legal effect instead of focusing on the sale.

What exactly is being sold?

The sale item needs to be described with enough detail to avoid later disputes. “The business” is often too vague on its own.

The document should clearly deal with:

• goodwill
• plant and equipment
• trading stock
• business name
• domain names and social media accounts, if relevant
• trade marks, copyright and other intellectual property
• customer and supplier contracts
• phone numbers, software licences and databases
• whether cash, debtors and work in progress are included or excluded

If a key asset is missing from the list, assumptions can unravel quickly. This is particularly common where the seller operates through a company and some assets are actually owned personally or by a related entity.

How is the price worked out?

The purchase price should not just state one number if the actual figure depends on adjustments. If stock is to be valued at completion, or if certain liabilities are excluded, say so clearly.

Points to pin down include:

• the fixed price, if any
• whether stock is included and how it will be valued
• whether plant and equipment values are agreed or still to be assessed
• whether debtors, creditors and employee entitlements are included, assumed or adjusted
• whether there will be an earn-out or deferred payment
• when the deposit is payable and whether it is refundable

Vague pricing clauses often lead to mistrust later, especially after due diligence reveals issues with stock levels, unpaid suppliers or outdated equipment.

What conditions must be satisfied?

A business sale often depends on other steps happening first. If the deal is conditional, those conditions need to be specific, realistic and tied to dates.

Common conditions include:

• satisfactory due diligence
• the buyer obtaining finance
• landlord consent to assign or grant a commercial lease
• franchisor consent
• third party consent to transfer major contracts
• board or shareholder approval, where relevant
• transfer or grant of required licences or permits

Do not rely on a broad phrase like “subject to due diligence” without explaining timing and scope. A better approach is to state how long the buyer has, what access the seller must provide, and what happens if the buyer identifies a material issue.

Are exclusivity and confidentiality fair?

Exclusivity can be useful, but the period should match the real work required to get the deal done. If the buyer gets a long exclusive window without clear milestones, the seller can lose negotiating leverage and market momentum.

Confidentiality is equally important. Before you share financial statements, supplier terms, pricing models, customer data or staff information, the document should say what may be disclosed, who can receive it, and how it must be handled.

Where personal information is involved, privacy obligations may also matter. That is especially relevant if the target business holds customer records, memberships, health information or employee files, and a privacy notice or data protection process may need review.

What happens to employees?

Employees can be one of the most sensitive parts of a business sale. The heads of agreement does not need every employment term, but it should identify the intended approach.

That may include:

• whether employees will transfer or be offered new employment
• who is responsible for accrued entitlements
• whether key staff must stay for completion
• whether the seller will consult with employees only after certain milestones

Employment obligations can become expensive quickly, so assumptions here are risky.

Will the seller be restrained, and will they help with handover?

If the buyer is paying for goodwill, they will usually want some protection against the seller setting up nearby and taking customers back. A restraint clause may deal with location, time period and the type of competing activity restricted.

The seller may also be expected to assist after completion. That could include introductions to suppliers, training, transition support, or a short consulting period. If this matters commercially, include it now rather than leaving it for the final contract drafting stage.

Who pays costs if the deal falls over?

Legal and accounting fees can mount quickly even at heads of agreement stage. The document should say whether each party bears its own costs or whether any costs become recoverable in certain circumstances.

This is especially important where one side requests extensive drafting, due diligence access or exclusivity. If the deal collapses because a condition is not met or one party simply changes direction, the cost position should not be left to assumption.

Common Mistakes With Heads of Agreement for Business Sale

The most common mistake is treating the heads of agreement like a formality. Before you sign, assume it will shape the rest of the transaction and draft it accordingly.

Using vague wording to keep things flexible

Some flexibility is sensible early on, but too much vagueness creates avoidable disputes. Terms like “usual adjustments”, “reasonable restraint”, or “standard due diligence” often mean different things to each side.

If a point matters to the economics of the deal, spell it out. The earlier that happens, the less likely it is that the parties will waste weeks negotiating from different assumptions.

Assuming non-binding means no risk

Many business owners hear “non-binding” and stop paying attention to the drafting. That is dangerous. A clause can still be enforceable if it is clearly expressed as binding, or if the document as a whole suggests the parties meant to create legal obligations on some points.

Even where enforcement is unlikely, a poorly drafted document can still shift commercial leverage. One party may use it as pressure in later negotiations, especially if the other side has already committed time, money or reputational capital to the deal.

Not tying exclusivity to clear milestones

Exclusivity without deadlines can trap a seller in limbo. A buyer may ask for several weeks or months to conduct due diligence, arrange finance and decide whether to proceed, while the seller stops speaking with other interested parties.

A better approach is to connect exclusivity to practical steps, such as due diligence access being provided within a set number of days, draft contract exchange by a target date, and the exclusivity ending automatically if key milestones are missed.

Leaving lease issues too late

For many businesses, the premises are central to value. If the landlord will not consent to an assignment, or the lease term is too short, the deal may change dramatically.

This catches out retail, hospitality, medical, childcare, fitness and service businesses regularly. If location matters, lease review and landlord engagement should happen early, not after everyone assumes the sale is nearly done.

Ignoring licences, approvals and third party contracts

Some businesses depend on permits, registrations or key supplier arrangements that cannot simply be handed over. Others rely on customer contracts with change of control clauses or consent requirements.

Examples may include:

• industry licences or council approvals
• franchise agreements
• major supplier contracts
• software subscriptions and platform accounts
• government accreditations
• finance arrangements over equipment

If the business cannot operate in the same way after completion, the headline purchase price may no longer make sense.

Relying on verbal promises

Business sales often involve goodwill and trust, especially where the parties know each other or the transaction is handled informally. That can lead to side promises about training, seller introductions, customer retention, stock quality or future support.

Before you rely on a verbal promise, ask for it to be reflected in the heads of agreement or clearly flagged for the formal sale contract. If it is important enough to influence price or risk, it should be written down.

Forgetting the due diligence scope

Due diligence should not be a vague right to “look into the business”. The buyer usually needs enough access to check financial records, contracts, staff arrangements, lease documents, intellectual property ownership, compliance issues and disputes.

The seller also needs boundaries. The document should say what access is allowed, how confidential material is protected, and whether customer or employee contact is restricted until later in the process, ideally under written terms.

FAQs

Is a heads of agreement for business sale legally binding in Australia?

It can be. Some heads of agreement are fully non-binding, some are partly binding, and some may be enforceable more broadly depending on the wording and the parties’ intention. The safest approach is to state clearly which clauses are binding and which are subject to a final contract.

Can I pull out after signing a heads of agreement?

Possibly, but it depends on what the document says. If it includes binding exclusivity, confidentiality, deposit or cost clauses, you may still have obligations even if the final sale does not proceed. Check the termination rights and any conditions carefully.

Do I still need a business sale agreement if I have signed heads of agreement?

Yes, in most cases. The heads of agreement is usually an early-stage deal document, while the business sale agreement deals with the full legal mechanics, warranties, indemnities, completion steps and risk allocation.

What should a buyer focus on most before signing?

A buyer should focus on what is being acquired, whether the price can change, what due diligence rights they have, what conditions must be met, and whether the seller is restricted from competing after completion. Lease issues and key contract consents should also be checked early.

What should a seller focus on most before signing?

A seller should focus on exclusivity length, deposit protection, due diligence limits, confidentiality, cost exposure if the deal falls through, and making sure the buyer cannot delay indefinitely. The seller should also avoid promising more transition support than they are willing to provide.

Key Takeaways

• A heads of agreement for business sale is not just a summary, it can create binding obligations and shape the final deal.
• The document should clearly state whether it is binding, non-binding or partly binding, and identify any clauses that take effect immediately.
• Price, assets being sold, conditions, deposit terms, confidentiality, exclusivity, lease issues and employee treatment should be addressed before you sign.
• Verbal promises, vague wording and missing detail around due diligence or third party consents are common sources of dispute.
• Asset sales and share sales carry different risks, so the transaction structure should be clear from the outset.
• A properly drafted heads of agreement can save time and costs, while a rushed one can create confusion and expensive renegotiation.

If you want help with deal terms, exclusivity clauses, due diligence conditions, and the business sale agreement, you can reach us on 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.