Heads of Agreement (HOA) – Essentials for Purchasers
Purchasing a business can be a significant investment that involves navigating various legal intricacies. The first, and one of the most important aspects of this process will ordinarily be negotiating and entering the HOA (sometimes referred to as a Term Sheet or Letter of Offer).
What is a Heads of Agreement?
The HOA is used to document the intentions of the parties and set out the agreed legal and commercial terms of the sale as the basis for the formal business sale agreement to be entered into at a later date.
The HOA is used to document the intentions of the parties and set out the agreed legal and commercial terms of the sale as the basis for the formal business sale agreement to be entered into at a later date.
A typical HOA will generally answer the following questions:
| HOA Essentials | |||
| Parties | Who is transacting? | Exclusivity | Is the due diligence period exclusive? |
| Assets | What is being sold? | Due Diligence | What is the scope of the due diligence period? (if any) |
| Price and Adjustments | How much:
– Fixed or formulaic pricing? – Will there be earn-outs or vendor finance? – Adjustments for working capital, stock, or employee entitlements? |
Restraints | How long, and within what proximity, will the vendor be prevented from competing with the business (non-compete), and how long will the vendor be restrained from engaging/ approaching any employees or clients of the business (non-solicitation). |
| Warranties | What warranty limits will apply?
– Dollar value? – Time period? |
Timetable | When will the deal occur? |
Binding or Non-Binding?
The legal enforceability of a HOA hinges on the language contained in the agreement, and the intention of the parties. For example, the HOA may be conditional on certain conditions being met or conditional on entering into a formal business sale agreement at a later date.
It is also common for an HOA to be largely non-binding, with certain key clauses that are legally enforceable (such as an exclusive dealing period or confidentiality provisions).
To avoid future disputes about the binding nature of any HOA, it is important to ensure that it explicitly states whether you and the vendor intend to be legally bound by the terms of the HOA.
Due Diligence and Finance Conditions
Unless due diligence has already been completed in relation to the target business, any prospective purchaser should ensure that the HOA is conditional upon satisfactory due diligence enquiries being conducted. Structuring the HOA in this way will allow you to progress your purchase and communicate your intentions to the vendor, while still allowing you to complete an appropriate level of due diligence.
Similarly, if you require finance to purchase the target pharmacy, you may wish to request the HOA be conditional upon you receiving finance approval for the purchase. This can be an important protection for you in the early stages of your purchase, as it will prevent you from being bound to purchase until you have secured funding.
Time Frames
If the HOA is conditional on certain items being satisfied (such as the due diligence and finance conditions discussed above) you should take note of any relevant time frames in which you may be required to provide notification to the vendor or take other specified actions.
It is important to be conscious of any such timing or notification obligations, as a failure to comply could have significant repercussions, including the loss of your deposit.
The Deposit
It may be the case that an initial deposit will be payable upon signing a HOA for the purchase of a business.
If you are required to pay a deposit, it is crucial that you are aware of the circumstances in which that deposit may be retained by the Vendor. In circumstances where the HOA is conditional on further conditions being satisfied (such as finance or due diligence conditions) you should confirm that the deposit will be refunded if those conditions are not met.
Termination of the HOA
Where an HOA is intended to be binding on the parties, it should clearly outline whether and when either party is permitted to terminate. If this is not the case, problems can arise for both parties if the purchase looks unlikely to proceed, as the Vendor may be prevented from re-listing the business and you may struggle to have the deposit returned.
Summary
Navigating the complexities of purchasing a business requires careful consideration from the outset of drafting, negotiating and entering into the HOA. Seeking legal guidance in this process may be crucial for ensuring clarity, mitigating risks, protecting your interests, and will ultimately make for a smoother and more successful transaction.
For further information on a purchase or sale process, please get in touch with the Mergers & Acquisitions Team at Hitch Advisory.