Heads of Agreement for a Business Sale in New Zealand

Buying or selling a business often moves quickly once the parties agree on price, but that is exactly when expensive misunderstandings can creep in. A common mistake is treating a heads of agreement like a casual summary, only to find parts of it are binding. Another is agreeing to broad exclusivity before due diligence is finished, which can leave a buyer exposed or a seller tied up for weeks. A third is relying on verbal promises about stock, staff, leases, or customer contracts that never make it into the written terms.

A heads of agreement for business sale can be a useful tool, but only if it is drafted with care. It should set out the commercial framework for the sale, make clear what is binding and what is not, and identify the issues that still need to be worked through before a full sale and purchase agreement is signed. Here is what New Zealand business owners should know before they sign.

Overview

A heads of agreement is usually an early-stage document that records the main commercial terms of a proposed business sale. It can help both sides move forward with focus, but the wording matters because some clauses may be legally enforceable even if the full sale contract has not yet been finalised.

The safest approach is to treat it as a serious legal document, not a handshake summary. If you get the framework wrong at this stage, the later negotiations often become slower, more expensive, and harder to unwind.

• Whether the document is intended to be fully non-binding, partly binding, or binding in specific clauses only.
• The purchase price structure, including deposits, adjustments, deferred payments, and any earn-out terms.
• Exactly what is being sold, such as assets, stock, goodwill, intellectual property, customer contracts, and business records.
• Conditions that must be satisfied before completion, including finance, due diligence, landlord consent, franchisor approval, or third party consents.
• Confidentiality, exclusivity, costs, and dispute process clauses.
• How employees, contractors, and key suppliers will be treated as part of the sale.
• The target timing for due diligence, contract preparation, and settlement.
• Whether restraint of trade and handover obligations need to be included at this stage.

What Heads of Agreement for Business Sale Means For New Zealand Businesses

A heads of agreement gives the buyer and seller a working roadmap, but it does not replace a proper sale and purchase agreement. In New Zealand, it is commonly used once the parties are broadly aligned on the deal and want to lock in the main commercial position before paying for detailed legal drafting and due diligence.

For a seller, this document can help confirm that a buyer is serious. For a buyer, it can create a period to investigate the business without fear that the seller will keep shopping the deal around. That said, the main value comes from clarity, not speed for its own sake.

What it usually covers

Most heads of agreement for a business sale set out the basic commercial terms and process. The exact content depends on the size of the deal, but it often includes:

• The names of the buyer and seller.
• The business or assets being acquired.
• The agreed price or pricing method.
• Any deposit arrangements.
• The due diligence period.
• Any exclusivity period.
• Confidentiality obligations.
• Important conditions that still need to be satisfied.
• The intended settlement date.
• Who pays legal and other transaction costs.

Why businesses use it

The main benefit is that it flushes out deal-breakers early. Before anyone spends money on lawyers, accountants, valuations, finance applications, or lease negotiations, the parties can test whether they are actually aligned.

This is particularly helpful where the sale includes stock, plant, customer agreements, online assets, or a lease assignment. These points often sound simple in conversation, but once written down, the gaps become obvious.

Binding versus non-binding terms

The most important issue is whether the document creates legal obligations. A heads of agreement is not automatically non-binding just because it is called a heads of agreement, term sheet, memorandum of understanding, or letter of intent. New Zealand courts will look at the wording, the surrounding context, and what the parties objectively intended.

Some deals are drafted so that the core commercial terms are non-binding, while specific clauses are binding straight away. Common binding clauses include:

• Confidentiality.
• Exclusivity or no-shop obligations.
• Costs.
• Governing law and dispute process.
• Access to information during due diligence.

This split approach can work well, but only if the document clearly says which parts are legally enforceable and which parts remain subject to a formal sale agreement.

Asset sale or share sale

The heads of agreement should also make clear whether the transaction is an asset sale or a share sale. That single point changes the legal and commercial risk profile of the deal.

In an asset sale, the buyer usually acquires selected business assets and may choose which liabilities to take on. In a share sale, the buyer acquires the company itself, which means the company’s existing rights, obligations, and risks generally stay with it. If the document is vague on this, the parties may discover later that they were negotiating two different transactions.

Legal Issues To Check Before You Sign

Before you sign a heads of agreement for business sale, make sure it says exactly what the deal is and what still needs to happen. This is where business owners often get caught, especially when the parties agree on price first and leave the rest for later.

What is actually being sold

The document should identify the sale subject matter with enough detail to avoid argument later. If the buyer thinks they are getting the full operating business, but the seller only intends to transfer selected assets, there is a problem from day one.

Spell out whether the sale includes:

• Goodwill and business name.
• Stock and how it will be valued.
• Plant, equipment, and vehicles.
• Intellectual property, including logos, software rights, designs, and domain-related assets.
• Customer lists and business records, subject to privacy compliance.
• Supplier contracts and key service agreements.
• Work in progress.
• Social media accounts and digital platforms.

If the business trades under a name that is commercially important, check who actually owns it. If trade marks are registered, those may need a formal assignment. If branding has been used without registration, the buyer should still confirm what rights are being transferred.

Price mechanics and payment terms

The headline price is only part of the story. The document should explain how the price is calculated, whether there will be completion adjustments, and when money becomes non-refundable.

Points that often need more detail include:

• Whether stock is included or added on top after a stocktake.
• Whether plant and equipment values are fixed or subject to review.
• Whether a deposit is payable, and when it becomes refundable or forfeited.
• Whether some of the price is deferred.
• Whether the deal includes an earn-out tied to future performance.
• Whether vendor finance is being offered.

Tax treatment can affect the way a business sale is structured, but that should be discussed with an accountant or tax adviser. The heads of agreement should not leave commercial payment points vague in the hope they will sort themselves out later.

Conditions precedent

Most business sale heads of agreement should state that the deal remains conditional on specific matters. Without clear conditions, one side may argue there is already a binding obligation to complete.

Common conditions include:

• Satisfactory due diligence by the buyer.
• Finance approval.
• Board or shareholder approval.
• Landlord consent to assign or grant a commercial lease.
• Franchisor consent, if the business is part of a franchise network.
• Third party consent to transfer key customer or supplier contracts.
• Agreement on a full sale and purchase contract.

The wording should state how and when a condition can be satisfied, waived, or terminated. A vague statement that the deal is “subject to due diligence” is often not enough. It helps to identify the due diligence period and whether the buyer has sole discretion to decide if the results are satisfactory.

Lease and premises issues

If the business operates from leased premises, the lease position is often one of the biggest practical issues in the whole sale. A buyer may not want the business without security of location, and a seller may assume the lease can simply be handed over.

Before you sign, confirm:

• Whether the premises are leased or owned.
• Whether landlord consent is needed.
• Whether a new lease, assignment, or deed of variation is required.
• Whether there are rent arrears, outgoings disputes, or repair obligations.
• Whether there are make-good obligations that could become relevant.

This is a common founder moment. The parties agree on a business price, announce the deal internally, and only then discover the lease cannot be transferred on acceptable terms.

Employees and contractors

Staff treatment should never be left to assumptions. In some business sales, employees transfer to the buyer under agreed arrangements. In others, the seller ends employment and the buyer offers new roles. Contractors may also need fresh agreements or assignment consents.

The heads of agreement should set out the broad plan for:

• Which employees the buyer intends to take on.
• Who is responsible for accrued entitlements.
• Whether key staff must sign new employment agreements.
• Whether restraint, confidentiality, or handover obligations apply to the seller.

Detailed employment advice may be needed before the final contract is signed, especially if there are union issues, vulnerable worker rules, or change management concerns.

Confidentiality, exclusivity and access to information

These clauses are often the only immediately binding parts of the document, so they deserve close attention. A seller may need to disclose sensitive customer, supplier, and financial information. A buyer may want comfort that they can investigate the business without being used as a stalking horse.

The document should address:

• What information can be shared and with whom.
• Whether advisers can access the information.
• How long confidentiality obligations last.
• Whether the seller is restricted from negotiating with other buyers for a set period.
• What happens to information if the deal does not proceed.

If personal information will be disclosed during due diligence, the parties should also think about privacy obligations, a privacy notice, and whether data should be anonymised, limited, or shared in stages.

Common Mistakes With Heads of Agreement for Business Sale

The biggest mistake is assuming the document is harmless because it is preliminary. A poorly drafted heads of agreement can create legal risk, damage negotiating leverage, and lock in commercial positions that were never properly tested.

Using unclear binding language

Founders often copy a template that says the agreement is non-binding, then include mandatory wording that looks binding in practice. If the clauses pull in different directions, the parties may end up arguing about enforceability before the real sale agreement is even drafted.

Clear drafting matters. If only some clauses are intended to bind immediately, the document should say that plainly and identify those clauses precisely.

Leaving key assets vague

Another common issue is assuming that “the business” means the same thing to both sides. It usually does not. A buyer may expect website content, customer databases, supplier accounts, and marketing materials to transfer automatically. A seller may not own all of those items, or may intend to keep some of them.

That gap creates delay, mistrust, and price renegotiation. The fix is simple, list the main assets and rights with enough detail to reflect the real deal.

Agreeing to exclusivity too early

Exclusivity can be reasonable, but only if the buyer is ready to move and the period is sensible. Sellers sometimes grant a long no-shop period to an early bidder who has not lined up finance, advisers, or decision makers. Buyers sometimes accept a very short due diligence period that is unrealistic for the business size or complexity.

The result is often wasted time and pressure-driven decisions. The exclusivity period should match the actual work required.

Relying on verbal side deals

Business sales often involve side discussions about training, introductions to major clients, seller transition support, or the seller not competing nearby. If those promises matter to the deal, they should appear in writing.

Before you rely on a verbal promise, ask whether it affects value, timing, or post-completion risk. If it does, record it in the heads of agreement or make it an express issue for the final contract.

Ignoring consent requirements

Many business sales cannot complete cleanly without third party consent. Leases, franchise arrangements, finance securities, and customer contracts may all restrict assignment or change of control. A heads of agreement that says nothing about these points can create false confidence.

It is better to identify the major consent issues upfront, even if the final legal mechanics come later.

Skipping the due diligence framework

Buyers often say they want due diligence, but the document does not define what they can review, how long they have, or what happens if something concerning appears. Sellers then become frustrated about repeated requests and uncertain timeframes.

A better approach is to outline the process, timing, confidentiality settings, and the buyer’s right to walk away if due diligence is not satisfactory.

FAQs

Is a heads of agreement legally binding in New Zealand?

It can be. The label does not decide the issue. The wording and the parties’ objective intention matter, and some clauses, such as confidentiality and exclusivity, are often drafted to be binding even where the main commercial terms are not.

Do I still need a sale and purchase agreement?

Yes. A heads of agreement is usually a framework document, not the full contract that transfers the business. You will generally still need a detailed sale and purchase agreement covering warranties, indemnities, completion steps, restraints, and risk allocation.

Should the purchase price be fixed in the heads of agreement?

Usually yes, at least in principle, but the document should also explain any adjustment mechanism. If stock, debtors, work in progress, or deferred payments affect the final amount, that should be stated clearly.

Can either party walk away after signing?

That depends on the drafting. If the document is mostly non-binding and subject to due diligence, finance, and a final contract, there may be a right to walk away. If certain obligations are binding, a party may still be held to those even if the sale does not complete.

When should a lawyer review the heads of agreement?

Before you sign, not after. Early contract review is usually cheaper and more useful because it helps you fix scope, binding effect, conditions, and risk points before they harden into the deal structure.

Key Takeaways

• A heads of agreement for business sale can help buyers and sellers align early, but it should be treated as a serious legal document.
• The document should clearly state what is binding and what is not, especially for confidentiality, exclusivity, costs, and process clauses.
• You should define the sale structure, assets being transferred, price mechanics, due diligence rights, and key conditions before you sign.
• Lease issues, employee arrangements, contract consents, and intellectual property ownership often cause delays if they are not addressed early.
• Verbal promises about handover, training, restraints, or included assets should be recorded in writing.
• Most transactions will still need a detailed sale and purchase agreement to complete the deal properly.

If you want help with binding and non-binding clauses, due diligence conditions, lease and consent issues, and sale agreement drafting, you can reach us on 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.