A heads of agreement (HOA) — also called a heads of terms or memorandum of understanding (MOU) in some jurisdictions — is a non-binding document that outlines the key commercial terms agreed between a buyer and seller in an M&A transaction before the formal Share Purchase Agreement is drafted. Common in Australia, Singapore, and Hong Kong, heads of agreement serve a similar function to a letter of intent (LOI) in the United States.
Purpose of a Heads of Agreement
A heads of agreement serves three primary functions in an M&A process:
- Alignment — Confirms that buyer and seller have agreed on the key commercial terms (price, structure, exclusivity) before incurring the cost of full legal drafting
- Exclusivity — Typically grants the buyer an exclusive due diligence and negotiation period, preventing the seller from negotiating with other parties
- 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:
- Indicative offers — Buyers submit non-binding indicative bids based on the information memorandum
- Shortlisting — Seller invites 2–4 preferred buyers to full due diligence
- Final offers — Buyers submit final binding bids post-due diligence
- Preferred buyer selection — Seller selects one buyer and enters into exclusive negotiation
- Heads of agreement signed — Key commercial terms are documented; exclusivity granted
- Legal drafting — SPA is drafted by lawyers based on HOA terms
- Signing — SPA is signed; conditions precedent to completion begin
- 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 advises business owners through every stage of the M&A process — from preparation and buyer selection through heads of agreement negotiation and final closing. Book a valuation meeting to understand how the transaction process works and what terms to expect.