Heads of Agreement When Buying a Business in Australia: What Buyers Need to Know

A heads of agreement is a document signed before the formal business sale contract that records the key commercial terms both parties have agreed to in principle. In Australian business sales, it typically covers the purchase price, the due diligence period, the deposit amount, key conditions, and a rough settlement timeline. It is not the final contract — but it's the document that tells both parties whether they're actually in the same ballpark before either side spends serious money on lawyers and accountants.

Most business sales in Australia worth more than $200,000 will involve one. For anything meaningful — a plumbing run, a cleaning round, a landscaping operation — the heads of agreement is usually where you find out whether a deal is real or just two people having an optimistic conversation.

What goes into a heads of agreement?

The exact contents vary, but most heads of agreement for Australian business sales cover seven to ten commercial points:

Purchase price, and whether it's fixed or subject to final adjustment
Deposit amount (usually 5–10% of the purchase price, held in a trust account)
Due diligence period — typically 20–30 business days for a small business
Conditions precedent the buyer must satisfy before settlement (finance approval, lessor consent, franchisor approval if a franchise)
Settlement date — often 30–60 days after conditions are met
Exclusivity period — the seller agrees not to accept competing offers while you complete due diligence
Confidentiality obligations
What's included and excluded from the sale (stock, vehicles, plant, customer lists, goodwill)

The rule of thumb on length: a heads of agreement for a small business should fit on two to four pages. If it's longer than that, someone's lawyer is drafting what should be an SPA clause.

The most common ambiguity is stock. Most heads will state whether stock is included in the headline price or adjusted at settlement — but the wording is often vague enough that both parties can read it differently. A broker told me last month about a deal where the buyer assumed all the stock was included at the stated price, the seller assumed it was in addition to it, and neither party caught the problem until the week before settlement. It added $80,000 to the final bill and nearly killed the deal (which is a more entertaining story now than it was at the time).

Is a heads of agreement legally binding?

Some parts are, some parts aren't — and most buyers get this wrong in one direction or the other.

The document as a whole is not a binding contract of sale. The seller can't force you to complete the transaction, and you can't force them to sell, based on a heads of agreement alone. But specific clauses within the document are typically drafted to be legally binding from the moment both parties sign:

Confidentiality provisions (almost always binding)
Exclusivity clauses (binding during the stated period)
Deposit arrangements (binding once the deposit is paid)
Break-fee provisions (if included)

The practical rule: if the heads of agreement says a clause is "binding on the parties", or uses words like "the parties agree that" rather than "it is intended that", it's enforceable. A seller who accepts your deposit and then continues to negotiate with other buyers during your exclusivity period is in breach — even though the main transaction hasn't settled. Australian courts have enforced exclusivity and confidentiality clauses from heads of agreement on multiple occasions in business sale disputes.

What this means practically: read the exclusivity clause before you sign anything, and make sure it says what you think it says.

Heads of agreement vs the sale and purchase agreement

The heads records the commercial terms. The sale and purchase agreement is the full legal document that actually transfers ownership — it includes warranties, indemnities, completion accounts, restraint of trade provisions, and the conditions that make up the bulk of the transaction.

In most Australian business sales, the sequence is:

Informal negotiations and offer
Heads of agreement signed (locks in price and key terms, triggers due diligence)
Due diligence completed
Formal SPA drafted and negotiated
Settlement

Some deals, particularly below $500,000, skip the formal heads entirely and go straight to a conditional contract. Whether you use a heads or not often depends on the broker and the lawyers involved — and some brokers use their own standard template that serves the same purpose without calling it a heads of agreement.

The heads of agreement is also different from a letter of intent. In the US, "letter of intent" is the standard term for this document. In Australian business sales, "heads of agreement" is more common — though you'll encounter both, and they're functionally equivalent in most cases. If a document is labelled "expression of interest", it's typically less formal and less binding than a properly structured heads.

What to negotiate before you sign

Most buyers sign whatever the seller's broker puts in front of them. That's the key mistake — because by the time you've done 20 days of due diligence and engaged lawyers to draft the SPA, changing the headline terms becomes psychologically difficult for both parties. Get the structure right in the heads.

Due diligence period: 20 business days is common; 30 is better for anything with significant operational complexity. If the period is too short, you either rush or ask for an extension after you've already spent money on accountants — and extensions give sellers an excuse to reopen the commercial conversation.

Exclusivity: Insist on it. Without an exclusivity clause, the seller can continue showing the business to other buyers while you're spending $5,000–$15,000 on due diligence. In a market where good trades businesses get multiple expressions of interest, that's a genuine risk.

Conditions precedent: Be specific. "Subject to finance" is almost useless as a condition if it doesn't define what constitutes approval, from what type of lender, and on what terms. "Subject to the buyer obtaining unconditional approval for a loan of $X from an approved Australian lending institution on terms satisfactory to the buyer" is meaningfully different.

Settlement date flexibility: Build in a mechanism for extension if conditions precedent can't be met in the initial period. Lease assignments, licence transfers, and finance approvals can all take longer than expected — especially in trades businesses where the licence holder needs to change their certifications.

Stock at settlement: If stock fluctuates materially, specify how it's counted and valued at settlement. A fixed price with stock included at a stated value avoids the kind of dispute I mentioned above.

For a detailed checklist of what to negotiate before signing, the Negotiation Checklist covers the commercial points in order of importance.

Common mistakes buyers make

Treating the heads as an admin step. Some brokers will present it as "just a formality" — a quick signature before the real work starts. It's not. The exclusivity period, the conditions, and the definition of what's included in the sale all have real consequences once you're 20 days into due diligence and both sides want to close.

Not getting a lawyer to review it first. Paying a commercial lawyer $500–$800 to review a heads of agreement before signing is one of the cheapest forms of insurance in a business acquisition. They'll spot ambiguous stock language, missing conditions, and exclusivity clauses that don't say what you think they say.

Over-legalising it. This one runs the other direction, and it's specifically a trap for buyers with a professional or corporate background. I've seen buyers send back a 12-page mark-up of a 3-page heads of agreement within 24 hours of receiving it. The seller pulled the business off the market. Heads of agreement should be short. Reserve the complexity for the SPA — that's the document where every word matters.

Ignoring the due diligence process timeline. The heads locks in how long you have to do due diligence. If you sign without thinking through what your accountant and lawyer actually need to examine — and how long it realistically takes — you'll either rush the process or be asking for extensions in a context where the seller is losing patience.

This is covered in depth in Module 7 of the Playbook, which walks through the full negotiation and closing sequence — how to structure your offer, what to flag in due diligence for price renegotiation, and how to manage the final SPA process without blowing up the deal.

Want the full checklist for reviewing a heads of agreement? Grab the Conditions Precedent Checklist free — it covers what conditions to include, how to word them, and what's missing from most standard templates.

Learning from other buyers' mistakes — and the occasional sharp deal analysis — is what The Leveraged Worker newsletter is about. It goes out weekly and it's free: you'll find the signup at the blog.

FAQ

Are heads of agreement legally binding in Australia?

Partially. The document as a whole is not a binding contract of sale, but specific clauses — confidentiality, exclusivity, break fees, and deposit arrangements — are typically drafted to be binding on both parties. Check each clause individually before signing; don't assume the whole document is either binding or non-binding.

Who draws up the contract for a business sale in Australia?

The formal sale and purchase agreement is typically drafted by the seller's solicitor. The buyer's solicitor then reviews it and negotiates amendments. In smaller deals, some transactions use a standard-form contract. The heads of agreement, by contrast, is usually prepared by the selling broker or the seller's lawyer and presented to the buyer.

In Australia, do I inherit the debt of a business when I buy it?

In an asset purchase — the most common structure for small business sales — you do not inherit the seller's debts unless they're specifically included in the sale. In a share purchase, you acquire the company including its liabilities. This is one of the primary reasons most buyers of small Australian businesses prefer asset sales over share purchases.