Heads of Agreement

Purpose of a Heads of Agreement

A heads of agreement serves three primary functions in an M&A process:

1. Alignment — Confirms that buyer and seller have agreed on the key commercial terms (price, structure, exclusivity) before incurring the cost of full legal drafting
2. Exclusivity — Typically grants the buyer an exclusive due diligence and negotiation period, preventing the seller from negotiating with other parties
3. Framework — Provides the outline from which lawyers draft the binding Share Purchase Agreement or SPA

What a Heads of Agreement Typically Covers

A well-drafted heads of agreement will include:

Commercial Terms

• Purchase price — Enterprise value or equity value, expressed as a fixed amount or formula (e.g. multiple of EBITDA)
• Consideration structure — Cash, share swap, earn-out, deferred consideration, vendor finance, or a combination
• Adjustment mechanisms — Whether the price is subject to a completion accounts or locked box adjustment

Deal Structure

• Share purchase or asset purchase — Whether the buyer is acquiring the shares of the company or the underlying assets
• Retained liabilities — Any liabilities or assets the seller retains
• Working capital basis — The normalised working capital target

Conditions

• Conditions precedent — Regulatory approvals (competition clearance, foreign investment review), third-party consents, financing conditions
• Outside date — The date by which the transaction must complete or either party may terminate
• Break-up fee — Whether a termination fee applies if the deal does not complete

Process Terms

• Exclusivity period — Duration of exclusive negotiation (typically 30–90 days)
• Confidentiality obligations — Reaffirmation of NDA obligations
• Access rights — Scope of due diligence access (documents, management, customers)
• Target closing date — Indicative timeline for completing due diligence, legal drafting, and closing

Binding vs Non-Binding Provisions

This is the most important distinction in any heads of agreement. Most commercial terms (price, structure, conditions) are expressed as non-binding — they represent the current intention of both parties but are not legally enforceable. However, certain provisions are typically made binding:

• Exclusivity obligation (seller agrees not to negotiate with other parties)
• Confidentiality (both parties agree to keep terms confidential)
• Costs (each party bears their own costs during due diligence)
• Governing law (which jurisdiction’s law applies)
• Termination (how either party can walk away if negotiations fail)

Treating non-binding provisions as binding — or misunderstanding which provisions are binding — is a common source of disputes in M&A negotiations. Both parties should obtain legal advice before signing a heads of agreement.

Heads of Agreement vs Letter of Intent vs Term Sheet

These documents serve the same function but are used in different markets:

Document	Common Jurisdiction
Heads of Agreement (HOA)	Australia, New Zealand, Singapore, Hong Kong, UK
Letter of Intent (LOI)	United States, Canada
Memorandum of Understanding (MOU)	Used across Asia — often more formal than a HOA
Term Sheet	Venture capital, PE; sometimes used in M&A

In practice, all four documents capture the same information — the key commercial terms agreed before legal drafting begins. The choice of title does not affect the legal status of the provisions.

How Heads of Agreement Fit Into the M&A Process

In a typical auction process:

1. Indicative offers — Buyers submit non-binding indicative bids based on the information memorandum
2. Shortlisting — Seller invites 2–4 preferred buyers to full due diligence
3. Final offers — Buyers submit final binding bids post-due diligence
4. Preferred buyer selection — Seller selects one buyer and enters into exclusive negotiation
5. Heads of agreement signed — Key commercial terms are documented; exclusivity granted
6. Legal drafting — SPA is drafted by lawyers based on HOA terms
7. Signing — SPA is signed; conditions precedent to completion begin
8. Completion — Transaction closes

The heads of agreement is signed at step 5 — after the buyer and seller have agreed commercial terms but before the full legal agreement is complete.

Negotiating a Heads of Agreement

For sellers, the most important HOA negotiating points are:

• Price and structure — Ensure the enterprise value and consideration structure are clearly expressed. Ambiguity in the HOA often emerges as disputes in SPA negotiations.
• Exclusivity period — Keep it as short as possible (30–60 days) to maintain competitive tension. Buyers typically request 60–90 days; sellers should resist periods beyond 60 days without clear milestones.
• Break-up fee — A reverse termination fee payable by the buyer if they withdraw without cause protects the seller against deal fatigue and opportunistic re-trading.
• Earn-out mechanics — If an earn-out is proposed, the HOA should include sufficient detail on calculation methodology to prevent later disputes.

Amafi.ai supports deal teams working through live transaction workflows — from preparation and buyer selection through heads of agreement negotiation and final closing. Talk to the Amafi team to understand how the transaction process works and what terms to expect.