Heads of Agreement Checklist for Australian Business Buyers

Heads of Agreement Checklist for Australian Business Buyers

Use this checklist before signing any heads of agreement, letter of intent, or memorandum of understanding on an Australian business purchase.

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Part 1: Commercial Terms — Is Everything Captured?

• Purchase price stated clearly — Is it a fixed figure, or expressed as a multiple/formula? If it's a formula, do you understand how it calculates?
• What's included in the price — Goodwill, plant and equipment, vehicles, intellectual property, customer lists, software licences, website, phone numbers. Each should be listed or explicitly covered by a blanket statement.
• What's excluded from the price — Cash, debtors, creditors, owner's personal items. Confirm these are either listed as excluded or accounted for in the working capital treatment.
• Stock treatment is explicit — Is stock included in the headline price at a fixed value, or adjusted at settlement? If adjusted, is the valuation method specified (cost, net realisable value, agreed methodology)?
• Working capital position — Does the heads address whether the business is to be delivered with a "normal" level of working capital, or is it silent on this? Silence here leads to disputes.
• Deposit amount and mechanics — Amount (typically 5–10% of purchase price), who holds it (usually the selling broker or solicitor trust account), and what happens to it if the deal falls over on a failed condition vs a buyer walk-away.

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Part 2: Due Diligence Period

• Period length is adequate — 20 business days is the common standard; 30 business days is better for anything with operational complexity, multiple sites, or significant plant. Don't accept less than 15 business days for anything meaningful.
• Start date is defined — Does the period start on signing, on receipt of the information pack, or on some other trigger? "Receipt of the information pack" is preferable — it protects you if the seller is slow to produce records.
• Extension mechanism exists — Is there a provision allowing the buyer to request an extension (e.g., 5–10 business days) if the seller hasn't provided all requested information? This is often negotiable and almost always worth including.
• What happens if you terminate during DD — Is your deposit returned if you terminate on the basis of an unsatisfactory due diligence outcome? The condition should say "in the buyer's absolute discretion" — not "on reasonable grounds."
• Access to information — Does the heads specify what information the seller must provide? Staff access, supplier contacts, customer lists, financial records, systems access. Specificity helps avoid disputes about what constitutes cooperation.

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Part 3: Conditions Precedent

Review each condition carefully. A condition that's too vague provides you with less protection than it appears.

• Finance condition is specific — If finance is a condition, it should state: (a) the amount, (b) the type of lending institution (an approved Australian lending institution), (c) what constitutes approval (unconditional approval, not just a preliminary assessment), and (d) the timeframe.
• Lease assignment condition is included — If the business premises require a commercial lease to be assigned or a new lease to be granted, this should be a separate condition, with a specified timeframe. Lessor consent can take weeks and may require financial information from you.
• Licences and permits — If the business requires specific licences (electrical contractor, pest control, food handling, etc.), is the transfer of those licences a condition? Can you operate the business from day one without them?
• Franchisor consent — If the business is a franchise resale, franchisor consent to the transfer is almost certainly required. This is typically a standalone condition with its own timeframe.
• Third-party consents — Any major contracts that require counterparty consent to assignment (key supplier agreements, franchise agreements, government tenders) should be conditions if they're material to the business value.
• Each condition has a waiver mechanic — Can the buyer waive a condition that's been partially satisfied? This gives you flexibility to proceed even if, for example, the finance approval has come in but the lease paperwork is still being finalised.

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Part 4: Exclusivity

• Exclusivity clause is present — The seller should agree not to accept competing offers, enter negotiations with other buyers, or continue to market the business during the specified period.
• Period covers your full DD timeline — Exclusivity should run at least to the end of the due diligence period, ideally plus a reasonable buffer (5–10 business days) to allow for SPA negotiation.
• What the seller cannot do is specified — "Will not sell to another party" is weaker than "will not market, negotiate with, accept offers from, or enter into any agreement with any other party." Push for the fuller form.
• This clause is drafted as binding — Confirm the exclusivity clause uses language like "the Seller agrees" or "is binding on the Seller" — not "it is the intention of the Seller" (which is unenforceable).
• Break fee exists if exclusivity is breached — Not always achievable, but worth requesting. A seller who agrees to pay $X if they breach exclusivity is more likely to honour it.

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Part 5: Confidentiality

• Both parties are bound — Confidentiality obligations should run both ways. You don't want the seller disclosing that you're in the process of buying their business to customers, staff, or competitors.
• Exceptions are limited — Standard exceptions (legal advisers, accountants, lenders on a need-to-know basis) are fine. Watch for exceptions that are too broad — "officers, employees, agents, contractors" without qualification creates holes.
• Duration is specified — Confidentiality should survive termination of the heads of agreement, not expire with it. Specify a period (commonly 2–3 years or until the information enters the public domain).
• Marked as binding — Like the exclusivity clause, the confidentiality provision should be explicitly drafted as legally binding even if the rest of the document is expressed as non-binding.

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Part 6: Settlement Date and Transition

• Settlement date is defined — Either a fixed date, or a specified number of business days after conditions are satisfied. The latter is preferable (avoids the risk of conditions being met late and settlement being compressed).
• Seller training and handover period — Is there a provision for a seller handover? How many days, is it paid or unpaid, and on what basis (employee, consultant, informal). Get this in the heads — it's much harder to negotiate once the SPA is being negotiated.
• Staff communication timing — When will staff be informed of the sale? Usually after settlement, but the heads should be clear on this, especially if staff discovery before settlement could damage the business.

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Part 7: Red Flags — Negotiate or Walk Away

These items in a seller-drafted heads of agreement should prompt immediate pushback:

• No exclusivity clause — Ask for it. If refused, understand why and weigh the risk.
• Deposit is non-refundable regardless of due diligence outcome — This is unusual and unacceptable for a due diligence-conditional deposit. Refusal to make it refundable on a due diligence failure is a red flag about the seller's confidence in their own records.
• Due diligence period under 15 business days — For anything above $200,000 and more than a micro-business, this is too short. Push back.
• Conditions are vague — "Subject to satisfactory due diligence" with no definition of "satisfactory" gives you less protection than it appears. Make sure each condition is specific.
• Stock included "at cost" with no verification mechanic — This is how stock disputes happen. Require an agreed stock take methodology at settlement.
• No extension provision — What happens if a third-party consent takes longer than expected? Without an extension mechanism, both parties are in limbo.
• Seller can terminate if buyer requests information — Some template heads include provisions allowing the seller to withdraw if they consider the buyer's due diligence requests "unreasonable." This is seller-protective and worth removing.

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Part 8: Final Review Before Signing

• Your solicitor has reviewed it — Even a 2–3 page heads of agreement deserves a quick review by a commercial lawyer. Budget $500–$800. The cost of a dispute over an ambiguous clause is multiples of that.
• You understand what's binding and what isn't — Make a list: what's binding from day one (confidentiality, exclusivity, deposit mechanics) vs what's non-binding (the commercial terms that will be formalised in the SPA).
• The headline terms reflect your understanding of the deal — Before signing, confirm verbally with the broker or seller that the price, inclusions, and settlement date match what was discussed. Heads of agreement sometimes get drafted with errors — better to catch them now.
• You have a copy of everything signed — Retain a copy of the fully executed heads of agreement. You'll need it when the SPA is being drafted to confirm the agreed terms.