As a business broker, guiding clients through the complexities of buying and selling a business is a crucial part of your role. One of the key initial steps in this process is negotiating and finalising a Heads of Agreement (HOA), also referred to as a Term Sheet or Letter of Offer. A well-drafted HOA ensures clarity, minimises disputes, and lays a strong foundation for a successful transaction.
What is a Heads of Agreement?
An HOA documents the key commercial and legal terms agreed upon by the parties, serving as the framework for a formal business sale agreement. By outlining the intentions of both buyer and seller, it helps set expectations and provides a roadmap for the transaction.
Key Elements of an HOA
A comprehensive HOA should address the following critical points:
| HOA Essentials | |||
| Parties | Clearly identify the buyer and seller (using correct legal names and entities to avoid confusion). | Exclusivity | Establish whether the buyer is granted exclusivity during the due diligence period to prevent the seller from negotiating with other parties. |
| Assets | Specify exactly what is being sold (e.g. business assets, shares, goodwill, intellectual property, etc). | Due Diligence | Outline the scope and duration of the due diligence process.
Ensure sufficient time for the buyer to conduct financial, legal, and operational investigations.
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| Pricing | Confirm sale price and whether it is fixed or formula-based.
Address financial factors like earn-outs, vendor financing, and working capital adjustments. |
Restraints | Set terms for non-compete and non-solicitation clauses, specifying duration and geographical restrictions. |
| Conditions | Define any key conditions that must be met before completion.
Outline contingencies, including due diligence and financing approval. Detail pre-settlement obligations such as contract transfers, lease assignments, or any other third-party consents. |
Timetable | Define key dates, including when due diligence must be completed and when the transaction is expected to complete.
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Binding or Non-Binding?
Understanding the legal enforceability of an HOA is essential. Typically, HOAs are non-binding except for specific provisions such as exclusivity, confidentiality, and deposit terms. To prevent disputes, it is critical to ensure the document clearly states which terms are legally binding.
Time Frames and Notification Obligations
When dealing with the respective parties, you should emphasise the importance of meeting deadlines outlined in the HOA. As failure to comply with timing requirements (e.g. providing due diligence findings or financing approvals) can result in the loss of deposits or termination of the agreement.
The Deposit
When structuring a deposit arrangement:
- Confirm whether a deposit is required upon signing the HOA.
- Clarify under what conditions the deposit is refundable (e.g., failed due diligence or financing approval).
- Protect both parties by specifying how and when funds are to be released.
Termination of the HOA
For HOAs with binding provisions, it is important to outline clear termination conditions:
- When and under what circumstances either party may withdraw.
- The impact of termination on any deposits or exclusivity periods.
- How disputes will be resolved if the transaction does not proceed.
The Broker’s Role in Drafting and Negotiating an HOA
As a broker, you play a crucial role in ensuring that the HOA is fair, clear, and aligned with your client’s best interests. Your responsibilities include:
- Facilitating negotiations between buyer and seller.
- Ensuring all key terms are included and unambiguous.
- Coordinating with legal advisors to ensure enforceability and compliance.
- Managing timelines to keep the deal on track.
Conclusion
A well-drafted HOA sets the stage for a smooth transaction by clearly defining terms, protecting both parties, and minimising risks. As a business broker, your expertise in structuring and negotiating HOAs is invaluable in achieving successful outcomes for your clients.
For further guidance on business sales and acquisitions, contact the team at Hitch Advisory.