When selling a business, it is essential to document the key commercial terms of the agreement before a sale of business agreement (SOBA) is prepared. Documenting the critical commercial terms will allow for a smoother and more efficient sale process.
A heads of agreement (HOA) allows you to set out the key commercial terms of your sale before preparing the SOBA. This article outlines what an HOA is and explains why you require one when selling your business.
What is a Heads of Agreement?
An HOA sets out the main terms and conditions of a business sale between the seller (the vendor) and the purchaser. The HOA is often used to ensure the parties agree on the key terms of the transaction before a more comprehensive SOBA is prepared. The HOA may also be known as a:
- letter of intent;
- sales advice;
- initial offer; or
- expression of interest.
An HOA may legally bind the purchaser and vendor to the terms before the SOBA is signed. However, if an HOA is non-binding, the purchaser and vendor will only be bound to the terms of the sale after signing the SOBA. The HOA should clearly state if it is a legally binding agreement.
Why Do I Need a Heads of Agreement?
As a vendor, providing an HOA to the purchaser allows you to establish the key terms agreed to with the purchaser early on. The HOA will allow you to document these terms to avoid any confusion when the SOBA is prepared. These key terms may include agreement on the following:
- the purchase price;
- date of settlement;
- equipment included in the sale;
- if there is a lease, whether it will be transferred;
- if the sale is subject to any form of finance, including vendor finance; and
- whether any the purchaser will undergo training.
An HOA may be particularly crucial if the preparation of the SOBA requires lengthy negotiation. This prevents multiple amendments to the SOBA, as the majority of the hard bargaining of key commercial terms is finalised in advance.
Additionally, an HOA is useful if the parties intend to be bound by the key terms. In this case, a legally binding HOA is beneficial as neither party can amend any terms while the vendor’s lawyer is preparing the SOBA.
7 Key Terms You Should Consider Including in a Heads of Agreement
When preparing the HOA, it is helpful to address the following areas:
- the parties;
- the transaction;
- purchase price;
- timeline; and
- completion conditions.
Your HOA should outline who is purchasing the business and who is selling the business. The buyer and seller can either be:
The HOA will outline what transaction the parties intend to agree on. For example, the agreement could be that one party will purchase a fish and chips shop operating:
- from the premises described; and
- under the business name detailed.
The HOA will document the purchase price and should include any payment terms. For example, the purchaser will provide a 10 per cent deposit after the exchange of a SOBA, paying the balance of the purchase price on the settlement date.
This term may be particularly crucial if you are offering a deferred payment or vendor finance. To ensure that the HOA accurately reflects the payment terms you have negotiated, a lawyer should review the agreement.
A list of assets may be attached to the agreement. The list outlines the assets that the sale will include. If there are certain assets that you require to continue operating the business after the purchase is complete, it is essential to add these assets to the agreement.
If your business has employees, the HOA should set out:
- what will happen to those employees; and
- who will be responsible for paying employee entitlements.
It is important to consider the inclusion of a timeline in your HOA to keep the purchase process moving. The timeline may include dates for completion of:
- a period of exclusivity under the HOA;
- due diligence;
- preparation and execution of a SOBA; and
- the purchaser obtaining finance approval to purchase the business.
Completion conditions are a set of steps required by each party to finalise the sale of the business. Your HOA should include the necessary steps needed for each party to complete the transaction. These conditions may include:
- transfer of the assets from the vendor to the purchaser free of any encumbrances or liabilities;
- if the sale involves the transfer of a lease, the purchaser and landlord entering into a new lease agreement or deed of assignment of lease; or
- that the vendor will continue to operate the business in the ordinary course until the sale is complete.
Selling a business can involve many moving parts and may be difficult to navigate at times. It is vital to document the negotiated and agreed commercial terms of the sale with your purchaser before entering into a SOBA. This will assist with minimising disputes about the commercial sale terms with your purchaser.
If you have any questions, contact LegalVision’s sale of business lawyers on 1300 544 755 or fill out the form on this page.
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