What Does a Heads of Agreement Actually Cover in an Australian Business Sale?

Most business owners reach the Heads of Agreement stage and treat it as a formality — a stepping stone to the "real" contract. That's a mistake. The Heads of Agreement (sometimes called a Heads of Terms, or in the US a Letter of Intent) is where the commercial terms of your deal are set. Once you've signed it, renegotiating those terms is much harder, even though the document itself usually isn't legally binding.

This article explains what a Heads of Agreement covers, which parts of it are actually binding, and what family business owners should look out for before they sign one.

What is a Heads of Agreement?

A Heads of Agreement is a document signed by the buyer and seller that records the key commercial terms of a proposed business sale. It comes before the formal sale and purchase agreement — typically after the seller and buyer have met, discussed price and structure, and reached a broad agreement in principle.

Think of it as the "handshake in writing." It says: here's what we've agreed in broad terms. Now let's do due diligence, get lawyers involved, and draft the real contract based on this.

In Australian business sales, a Heads of Agreement usually covers:

• The purchase price and how it's structured (lump sum, instalments, earnout, vendor finance)
• What's being sold (assets or shares, what's included and excluded)
• Due diligence conditions (what the buyer needs to confirm before committing)
• Exclusivity (whether the seller agrees not to talk to other buyers for a period)
• Target settlement date
• Confidentiality obligations
• Any special conditions (lease assignment, regulatory approvals, franchisor consent)

Is a Heads of Agreement legally binding?

This is the question sellers ask most often — and the answer is: it depends on which clause you're looking at.

A typical Heads of Agreement is partly binding, partly not. The main commercial terms (price, what's being sold, settlement date) are usually expressed as non-binding — meaning neither party is legally required to complete the sale if they choose to walk away. The document is an expression of intent, not a commitment to proceed.

However, certain clauses are commonly written to be legally binding:

Clause	Usually binding?	Why it matters
Confidentiality	Binding	Both parties commit to keeping deal terms and information confidential
Exclusivity	Binding	Seller agrees not to negotiate with other buyers for a defined period
Break fee	Binding (if included)	Party who walks away pays a penalty — protects against time-wasting
Purchase price	Non-binding	Can be adjusted through due diligence, but sets the anchor for negotiation
What is being sold	Non-binding	Sets the scope, but subject to change in the formal contract
Settlement date	Non-binding	A target only — formal contract will include the binding date
Due diligence conditions	Non-binding	Framework for what the buyer will investigate, not legally enforceable

The practical implication: you can walk away from the deal after signing a Heads of Agreement. But you can't walk away from the confidentiality obligations or (if included) break fee clauses. And even though the commercial terms aren't binding, the document has real force — because once you've agreed to a price in writing, reopening that negotiation is psychologically and practically difficult.

Always have a lawyer review the Heads of Agreement before you sign it. It is not a "just sign and get to the real contract" document.

What the Heads of Agreement covers — section by section

1. The parties

Who exactly is buying and who is selling. This matters more than it sounds. Are you selling as an individual, as a trustee of a family trust, or as a company? Is the buyer a person, a company, or a company yet to be formed? The entity named in the Heads of Agreement sets the structure for the formal contract — and changing it later can have tax and legal consequences.

Many family business owners are surprised to discover their business is technically owned by a family trust or holding company rather than directly by them. Getting this right from the start avoids complications down the track.

2. What is being sold

This section defines the scope of the deal. In most small to medium Australian business sales, you're selling either the assets of the business (equipment, inventory, goodwill, customer contracts, intellectual property) or the shares in the company that owns the business.

The distinction matters enormously — for both parties. Asset sales are generally preferred by buyers because they don't inherit the company's historical liabilities. Share sales are often preferred by sellers because of more favourable tax treatment, particularly access to the small business CGT concessions.

The Heads of Agreement should clearly state:

• Whether it's an asset sale or a share sale
• What specific assets are included (or excluded)
• Whether the sale includes debtors, creditors, cash on hand, and existing inventory
• What happens to the business bank accounts at settlement

Vague language here ("the business as a going concern") creates problems later when the lawyers try to define exactly what changed hands.

3. Purchase price and payment structure

The headline number everyone focuses on — but the structure is just as important as the amount. A Heads of Agreement will typically specify:

• Total consideration: the headline purchase price
• Deposit: usually 10% paid when the sale contract is signed
• Payment structure: lump sum at settlement, or some combination of upfront payment and deferred components
• Earnout provisions: if part of the price depends on the business hitting future performance targets, this should be clearly described
• Vendor finance: if you're lending part of the purchase price to the buyer, the principal amount, interest rate, term, and security should be outlined
• Working capital adjustment: whether the final price is adjusted based on the level of working capital (debtors, inventory, creditors) at settlement

The working capital adjustment is one of the most-negotiated items in Australian business sales and one of the least understood by sellers. If the Heads of Agreement is vague about how working capital will be calculated and what the "normal" level is, expect a dispute at settlement. See our detailed guide on vendor finance in Australian business sales if the buyer has proposed a deferred payment component.

4. Due diligence conditions

Due diligence is the process where the buyer (and their accountants, lawyers, and advisers) investigate the business to verify that it is what you say it is. The Heads of Agreement typically sets out:

• How long the due diligence period will run (commonly 30–60 days for SME sales)
• What the buyer is entitled to access and review
• Whether due diligence is a condition of the sale proceeding (almost always yes)
• What standard the buyer needs to be satisfied to — often "satisfactory due diligence in the buyer's sole discretion," which is broad

A common mistake: sellers assume due diligence is a formality. It isn't. Due diligence is where many deals fall over, and where many prices get renegotiated downward. Buyers who find surprises — undisclosed debts, customer concentration, messy financials, key staff at risk of leaving, lease terms that expire in 12 months — use those findings as leverage.

The best preparation you can do before the Heads of Agreement stage is to review your own business the way a buyer would. Fix what you can. Disclose what you can't. Surprises kill deals; known issues are negotiable.

5. Exclusivity

This is the clause that most sellers don't read carefully enough. An exclusivity clause prevents you from negotiating with any other potential buyers for a defined period — usually 30–90 days while the buyer completes due diligence and lawyers draft the formal contract.

Exclusivity is generally reasonable — a buyer is about to spend significant money on due diligence and legal fees. They don't want to do that if you're simultaneously running a parallel process with three other buyers.

But exclusivity clauses can be written in ways that are unfair to sellers:

• Too long: 90-day exclusivity with no consequence for the buyer dragging their feet is free optionality for the buyer, not a shared commitment. Prefer shorter periods with mutual accountability milestones.
• Too broad: Some exclusivity clauses prevent you from even talking to other buyers, taking approaches, or marketing the business. If the deal falls over at day 89, you've lost three months of market access.
• No exit mechanism: If the buyer hasn't completed due diligence or produced a draft contract within a reasonable timeframe, you should have the right to terminate the exclusivity and go back to market.

Ask your lawyer to review the exclusivity clause carefully. A buyer who won't negotiate reasonable exclusivity terms is a warning sign about how they'll behave in the formal contract negotiation.

6. Special conditions

Every deal has its own special conditions — things that have to happen before the sale can complete. Common ones in Australian family business sales include:

• Landlord consent: If the business operates from leased premises, the landlord usually has to approve the assignment of the lease to the new owner (or grant a new lease). This can take time and the landlord can decline.
• Franchisor consent: If you operate a franchise, the franchisor must approve the transfer of the franchise agreement. Some franchisors charge transfer fees; others have minimum requirements for incoming franchisees.
• Licence or regulatory approvals: Businesses that operate under licences — liquor licences, trade licences, financial services authorisations — may need those transferred or reissued in the buyer's name.
• Key staff retention: Some buyers make the sale conditional on specific employees agreeing to stay on for a defined period.
• Seller transition period: Many deals include an obligation for the seller to remain involved for a period after settlement to support the handover. The length and terms of this should be spelled out clearly.

Each of these special conditions is a potential point of failure. A landlord who won't consent to an assignment can kill a deal that's otherwise agreed. Build enough time into the deal structure to address these.

7. Confidentiality

Both parties agree not to disclose the existence of the deal or its terms to anyone except their professional advisers. This clause is almost always legally binding.

Confidentiality matters for obvious reasons: if your staff find out you're selling, key employees start looking for other jobs. If customers find out, they may start looking for alternative suppliers. If competitors find out, they may approach your customers and staff.

Make sure the confidentiality clause covers both parties symmetrically. Buyers sometimes want to conduct due diligence with external advisers — accountants, lawyers, sometimes industry consultants — and all of them should be bound by the same obligations.

8. Break fees

A break fee is a payment one party makes to the other if they walk away from the deal after signing the Heads of Agreement. Not all Heads of Agreements include them, but they're increasingly common in Australian SME sales.

Break fees serve a legitimate purpose: they discourage time-wasting and compensate the non-walking party for the costs they've incurred (legal fees, accountant fees, management time). Typical break fees in SME deals range from $20,000 to $100,000 depending on deal size, or 1–2% of the purchase price.

Be careful about accepting a break fee clause that applies only to you as seller. If the buyer can walk away without penalty but you can't talk to other buyers, you've given up significant leverage. Break fees should be mutual.

What the Heads of Agreement doesn't cover

A Heads of Agreement records the commercial framework — it deliberately leaves detailed legal terms for the formal contract. The formal sale and purchase agreement will go much deeper on:

• Representations and warranties: The formal promises you make about the accuracy of information provided, the state of the business, and the absence of undisclosed liabilities
• Indemnities: Your liability if those promises turn out to be wrong
• Restraint of trade: How long you're prevented from starting a competing business after the sale
• Specific settlement mechanics: The exact process for calculating and paying adjustments on settlement day
• Post-settlement obligations: What you're required to do after the keys change hands

The Heads of Agreement sets the commercial anchor. The formal contract fills in everything else. Which is why a careful Heads of Agreement negotiation matters — it's much easier to negotiate price, exclusivity, and payment terms before lawyers are involved than after.

Common mistakes sellers make with a Heads of Agreement

1. Signing without legal review

The most common and most expensive mistake. Many sellers treat a Heads of Agreement as a simple document and sign it without legal advice. The confidentiality and exclusivity clauses are legally binding from the moment you sign — and the commercial terms, while technically non-binding, create strong expectations that are hard to walk back.

Get a business lawyer to review it. The fee is small relative to the deal size and the potential downside of signing something you don't fully understand.

2. Accepting vague price adjustment language

Working capital adjustments and earnout calculations are frequently disputed because they weren't defined clearly enough in the Heads of Agreement. If the document says "subject to working capital adjustment" without defining what working capital means for your business, the adjustment will be negotiated (and fought) at settlement. Define it now.

3. Agreeing to a price before you've had proper advice

Business owners sometimes agree on a price informally with a buyer — over lunch, or on the phone — before either party has spoken to advisers. By the time the Heads of Agreement is drafted, the seller feels committed to that number. Buyers know this and use it.

Get an independent view of what your business is worth before you enter any negotiation. An indicative valuation assessment is a starting point. A formal valuation from an accountant or business valuator gives you a defensible number to negotiate from.

4. Ignoring the exclusivity period length

A 90-day exclusivity period sounds reasonable. But if the buyer takes 60 days to complete due diligence, and the lawyers take another 30 days to draft a contract, you're now three months in — and if the deal falls over, you're starting again from scratch in a market that may have changed. Negotiate the shortest reasonable exclusivity period, with milestone obligations on the buyer.

5. Not accounting for what happens if the deal falls over

Every seller signs a Heads of Agreement expecting the deal to close. Many deals don't. Have a plan for what happens if due diligence reveals something the buyer can't accept, or if the buyer's financing falls through. What information will have been shared? Are you bound by confidentiality post-termination? Is there a break fee that compensates you? Getting this right in the Heads of Agreement means you're not in a desperate position if things go wrong.

The sequence from Heads of Agreement to settlement

To put the Heads of Agreement in context, here's where it sits in the overall sale process:

1. Preparation: Business is prepared for sale — financials cleaned up, information memorandum prepared, business valued
2. Go-to-market: Buyer approached or listing published, NDAs signed, information shared with qualified buyers
3. Offer and negotiation: Buyer makes an offer; seller and buyer agree in principle on commercial terms
4. Heads of Agreement signed: Commercial terms written down; exclusivity begins; due diligence kicks off
5. Due diligence: Buyer investigates the business — financials, contracts, leases, staff, customers, regulatory compliance
6. Formal contract drafted and negotiated: Lawyers prepare the sale and purchase agreement; terms from the Heads of Agreement become the basis
7. Contract signed: Legally binding commitment to complete the sale
8. Settlement: Funds change hands, ownership transfers, post-settlement obligations begin

The Heads of Agreement is step 4. Everything before it determines your negotiating position. Everything after it — due diligence, formal contract, settlement — is easier if the Heads of Agreement was done properly.

For a full picture of how long each of these stages takes, see our guide on how long it takes to sell a business in Australia.

A checklist before you sign a Heads of Agreement

Before you put pen to paper, work through these questions:

• Have you had a lawyer review it? (If no, stop and get one.)
• Do you understand which clauses are binding and which aren't?
• Is the purchase price based on an independent view of value, or did you just accept the buyer's offer?
• Is the exclusivity period reasonable? Does it include milestone obligations on the buyer?
• Is the working capital adjustment (if any) clearly defined?
• Are there any special conditions (lease, licence, franchisor) that could block settlement? Are realistic timeframes built in?
• Is there a break fee? Is it mutual?
• Do you understand what happens to your confidentiality obligations if the deal falls over?
• Is the seller transition period clearly defined — and is the compensation (if any) clearly stated?

What comes next

If you're at the Heads of Agreement stage, you're close to one of the biggest financial transactions of your life. The work you do in the next few weeks — in due diligence preparation, in reviewing the document carefully, in understanding your obligations — will directly affect both the outcome of this deal and your ability to walk away cleanly if something goes wrong.

Before anything else, get two things sorted: a lawyer who specialises in business sales (not a general solicitor), and an accountant who understands the tax implications of your specific deal structure. The cost of those advisers is one of the best investments you'll make in the process.

And if you haven't yet done a clear-eyed review of what your business is worth and where its vulnerabilities are — before the buyer's due diligence team finds them — start there. Our free Seller Readiness Assessment will give you an indicative valuation and flag the preparation gaps that are most likely to affect your price or deal structure.