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When you have finished the negotiation process for selling your business, you draft a sale and purchase agreement. This outlines the deal’s terms, and both you and your buyer sign this document. But, negotiating a business sale can be complicated and lengthy. Hence, you may find a preliminary document setting out the basic terms of your relationship useful. One kind of initial document you may come across is a Heads of Agreement (HOA). This sets out the essential terms of the transaction, which sets the tone of future negotiations. This article will explain what a Heads of Agreement is, and other useful things to note when selling your NZ business.

What Is a Heads of Agreement?

An HOA sets out the key terms for your business sale. Both you and the buyer would agree on these key terms to ensure you are both on the same page before negotiating any further. You would do this before you go into more depth with a sale and purchase agreement. An HOA is also known as a:

  • letter of intent;
  • memorandum of understanding; 
  • term sheet;
  • initial offer; or
  • expression of interest.

You use an HOA at the beginning of the negotiation process, once you have found a buyer. Generally, a Heads of Agreement is not binding. You would typically only be bound by the terms you agree on after you sign an HOA, in your sale and purchase agreement. But, in some cases, it may be legally enforceable. You can make matters easier by clearly stating in the document whether you and the buyer intend to be bound by the terms in it.

Do I Need a Heads of Agreement When Selling My Business?

You do not necessarily need an HOA, but it can be useful to have one. One advantage of having an HOA is that it can organise what could be a complex negotiating process. An HOA provides clarity by outlining a timeline and steps for each party to take. Consequently, you can save time and money by agreeing on essential terms at the outset so that you and the buyer know the nature of the transaction.

Additionally, an HOA will establish what is important to each party in the transaction. For example, the buyer may be interested in your business because of its prime location so that you would include a transfer of the property’s lease as part of the sale. 

Likewise, you can establish security for both parties with an HOA, as it shows the serious intent to enter into contractual relations. If you have confidentiality concerns, you can bind the other party to non-disclosure obligations with an HOA. 

What Should My Heads of Agreement Cover?

Your HOA should focus more on substance, rather than form. It should be as concise as possible, with a clear purpose. It should only contain the basic, but essential terms for your business sale going forward.

Tip: Your HOA may also contain ‘agreement to agree’ terms. These outline certain matters that you and the buyer may decide to agree upon at a later date, such as a final price.

Key Terms

Some key terms that your HOA may cover include:

Parties

Make sure to clearly identify who the parties to the agreement are. This becomes especially important when companies are involved.

Transaction

Your HOA should outline the nature of the transaction you and the buyer agree on. For example, you and the buyer could agree that they are buying your cafe, which includes their continued operation of the business from the same location and under the same name.

Price

You will document the initial purchase price for your business, as well as any additional payment terms. This could include a payment schedule, such as a deposit after the buyer signs the sale and purchase agreement and they pay the rest on the settlement date.

Timeline

It may be useful to include a timeline in your HOA to create a negotiation process plan and keep things moving. This timeline would outline the due diligence and exclusivity period and provide a date to draft the sale and purchase agreement.

Employees

If you have any employees, it may be useful to outline their status in the business sale early on in the process. You should set out what will happen to your employees when you complete the sale, and who is responsible for paying their entitlements.

Assets

Your HOA should detail what assets you will include in the business sale. This is crucial, especially if the buyer requires these assets to run the business.

Confidentiality

If you have concerns about confidentiality or protecting your intellectual property (such as trade secrets), you can include a term binding the buyer in your HOA.

Completion Conditions

This would be a term that outlines the steps that each party needs to take to complete the business sale, such as transferring assets.

Key Takeaways

A Heads of Agreement is a preliminary document you can draft to set the stage for future negotiations with your business’s potential buyer. It sets out the transaction’s key terms and provides a starting point for establishing contractual relations. If you would like more information or help with your Heads of Agreement when selling your business, contact LegalVision’s New Zealand business sale and purchase lawyers on 0800 005 570 or fill out the form on this page.

FAQs

What Is a Heads of Agreement?

A Heads of Agreement (HOA) is a preliminary document you can use when selling your business. It outlines the essential terms of the business sale: the terms that you and your buyer require for the sale to go forward.

Is a Heads of Agreement legally binding?

In most cases, a Heads of Agreement is not legally binding. But there are some instances where it can be. If it has all the essential elements of a contract, you may be bound by this document. You should clearly state in your Heads of Agreement whether you intend to be bound by its contents.

Should I use a Heads of Agreement when I sell my business?

A Heads of Agreement can be useful when selling your business because it clarifies what is important to both you and your buyer in a simple document. This means that future negotiations may be simpler if you have already established certain key points.

Do you pay tax when selling a business in New Zealand?

New Zealand does not have a capital gains tax, so you would not pay that when selling your business. There may be other tax obligations you have to comply with as the seller, such as GST rules.

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