What a heads of agreement records.
The parties, often with a broker, will frequently settle the essential points first and record them in a heads of agreement, which is then handed to the lawyers to turn into a contract. A heads of agreement can range across the price or the method of working it out, when and how it is paid, what is included and excluded, whether the premises are owned or leased, intellectual property to be assigned, discharge of any directors' guarantees, training and the seller's future involvement, restraints, the transfer of service contracts, leases and licences, warranties and indemnities, the employees, the timetable, the legal costs, and confidentiality and exclusivity.
What binds and what does not.
As a rule it is not binding, because the parties intend to be bound only by the formal contract. The exception is any clause clearly meant to take effect at once, typically confidentiality and exclusivity, so the document can commit you on those points while the rest stays open. Its value is as a guide to the deal both sides believe they have struck.
The gap to the contract is wide.
At the heads of agreement stage the buyer has often not done due diligence, has seen financial reports but not tested them against the primary records, has not thoroughly inspected the premises because the seller wants the sale kept quiet, and has not spoken to suppliers or customers. So significant negotiation remains, and the clearer and more complete the heads of agreement, the smoother the contract that follows. Our business sale and purchase service takes a heads of agreement through to a signed contract.
The confidentiality and exclusivity clauses can bind you even though the rest of the heads of agreement does not. Read those two before you sign, because they take effect immediately.
Law referenced: general contract principles.