What Are Heads of Agreement (HOA) in Business Sales?

One of the most misunderstood documents in business sales is the Heads of Agreement (HOA). Many buyers and sellers sign them without realising the impact they can have.

In Queensland business sales, a HOA, sometimes referred to as a Term Sheet, Letter of Intent or Memorandum of Understanding, is a preliminary document that records the key commercial terms agreed between the buyer and seller before the formal Business Sale Agreement is prepared.

Many buyers and sellers think a HOA is non-binding, but that assumption can be misleading. At best, it sets commercial expectations that shape the final agreement and make renegotiation difficult. At worst, a poorly worded HOA can create unintended binding obligations that the court may enforce.

Because a HOA can override standard protections and lock parties into obligations they may not fully understand, buyers and sellers should never treat it as a simple formality. Careful review before signing is essential.

Why Are HOA So Common in Business Sales?

Brokers, sellers, and buyers often want “something on paper” early in negotiations. A HOA is attractive because it captures the key terms, giving both sides comfort that the sale is moving forward. It reassures financiers and other third parties that the negotiations are genuine, and it provides lawyers with a starting point for drafting the formal Business Sale Agreement.

Cost is another key factor. Many parties avoid legal fees until they feel confident they agree on the main commercial terms. A HOA reassures them before they invest further time and money in due diligence or detailed drafting.

The convenience of a HOA, however, comes with risks. If signed too quickly without proper advice or clarity, it can lock parties into obligations they did not intend and later regret. This is why HOAs are often the first step in Queensland business sales — but also one of the riskiest.

Key Inclusions in a HOA for Business Sales

A HOA for the sale of a business in Queensland will usually include:

• Purchase price and payment structure. Whether it is a lump sum, instalments, or vendor finance, and whether adjustments will apply for stock at settlement.
• Deposit. How much is payable, when it must be paid, and how it is to be held.
• Assets included in the sale. Stock, equipment, intellectual property, licences, client databases, or goodwill.
• Settlement date. Including any conditions that might affect timing.
• Pre-conditions. For example, landlord consent to a lease assignment, finance approval, franchisor approval, or regulatory approvals such as liquor or gaming licences.
• Special conditions. For example, restraint of trade, handover training, retention clauses, or earn-out arrangements.
• Lease terms. Whether the buyer will take an assignment of the existing lease or enter into a new lease with the landlord.

Each of these inclusions carries commercial weight. For example, unclear lease arrangements can leave a buyer committed to buying a business without secure premises to operate from.

Risks in a HOA for Business Sales

The risks of treating a HOA as “just paperwork” are significant:

1. They can become binding. Unless clearly marked “subject to contract,” courts may enforce obligations under a HOA if the wording or conduct shows an intention to be bound.
2. They can override standard protections. A HOA may introduce conditions that would not normally appear in a standard Business Sale Agreement, such as shifting all employee entitlements or risk of loss to the buyer.
3. Parties may not fully understand the obligations. Without advice, a party might agree to tax liabilities, overpay for stock, or accept restraint clauses that offer little real protection.
4. They steer the final agreement. Once parties record terms, they treat them as the default for drafting the formal contract, making them difficult to renegotiate later.
5. Vague or missing terms cause disputes. For example, stating “price as per valuation” without defining how the valuation will be done can lead to serious conflict at settlement.

The HOA Traps Most Buyers Overlook

The most common problems with HOAs are not about the business itself, but about the way the document is drafted. Traps often arise when:

1. Legal or industry jargon is used without explanation. Terms such as “standard retention” or “market rent” may seem clear but can mean very different things to different parties.
2. Wording is vague or ambiguous. Expressions like “reasonable training” or “sufficient stock” leave too much room for interpretation and create disputes later.
3. Timelines are unclear or missing. For example, saying “subject to landlord consent” without a deadline can leave a buyer tied to the sale indefinitely.
4. Conditions are too open-ended. A clause such as “price subject to valuation” without stating how the valuation will be carried out creates uncertainty and potential conflict.
5. Key issues are left out entirely. Silence on matters such as restraints of trade, retention clauses, or vendor finance arrangements can create major problems. If a term would be a deal breaker, it should always be included in the HOA.

These traps highlight why buyers and sellers should always approach a HOA with care. Clear wording, defined parameters, and legal review are essential to prevent misunderstandings from escalating into costly disputes.

Best Practice: How to Approach a HOA

Parties should approach a HOA with the same care as the final contract. While it is often seen as a preliminary document, the way it is drafted can have lasting consequences for both parties. To reduce the risk of disputes and ensure the document reflects true intentions, it is important to follow best practice.

Anyone entering into a business sale should:

1. Seek legal advice before signing, even if the HOA is brief.
2. Ensure the HOA clearly states whether it is intended to be binding or “subject to contract.”
3. Use clear and unambiguous wording that leaves no room for different interpretations.
4. Define any preconditions with deadlines to prevent the transaction from stalling indefinitely.
5. Set a realistic timeline for settlement that reflects what both parties can reasonably achieve.
6. Address essential commercial issues such as tax treatment, employee arrangements, and lease terms at a high level, leaving detail for the formal agreement.

Conclusion

In business sales, a Heads of Agreement (HOA) may seem like a simple first step, but it is far from harmless. At best, it shapes the expectations that define the final contract. At worst, it can create binding obligations and lock parties into terms they did not intend to accept.

Buyers and sellers should never dismiss a HOA as “just paperwork.” A legal professional should carefully draft and review every HOA to ensure it reflects true intentions, avoids unnecessary risk, and protects your interests before you go further.

Feeling unsure about signing a HOA? We can help you make sense of the fine print and protect your interests from the start. Contact Ardor Legal today for clear, practical advice that gives you confidence in your next step.