Unfortunately, some solicitors are not always open to this approach, despite a Heads of Agreement/Contract Note being a common practice in the buying and selling of property, businesses and other investment structures. However, the problem with NOT signing a Heads of Agreement early on can cause more difficulties in the later stages of a sale.
In a recent sale, both parties (the vendor and the purchasing pharmacist), had agreed to proceed with the HOA. However, the solicitor's (of which only one had pharmacy experience), declined to use a HOA citing the following reasons:
- The document is a disguised contract of sale;
- Signing this document is not the usual practice followed by other brokers that operate in NSW and is not recommended; and
- Normally Due Diligence and Finance arrangements occur prior to entering formal contracts.
Despite these coming from a respected solicitor with a strong pharmacy background, these considerations are not in the best interest of either the buyer or the seller. Here are my comments regarding these reasons:
- A HOA is not supposed to be a Contract of Sale. But it should contain sufficient Terms & Conditions to be a binding agreement and to set a timetable for settlement - this ensures all parties are on the same page and have a document to refer to that confirms the process to be taken once an offer has been accepted;
- As indicated in the opening paragraph, in almost every sale that contains an investment, a document is used to summarise the transaction as a precursor to the Contract of Sale - be it either a HOA or a Contract Note. The preparation of a Contract of Sale can be an expensive and time-consuming exercise. When a business is sold subject to conditions, it is important to ensure these conditions are met before engaging in costly legal expenses to complete the Contract of Sale; and lastly
- I cannot believe that ANY solicitor would agree to allow a buyer to proceed with Finance or Due Diligence applications without some sort of commitment, deposit or agreement that confirms the terms that these are to be conducted under. Finance and Due Diligence need to be defined to have any meaning and without pre-commited timelines these exercises can continue for an indefinite period of time. A HOA will define these conditions, and provide a reasonable timeline to ensure that there is some method to the process.
In this instance, the vendor and the purchaser chose to move to the Contract of Sale. Unfortunately, the Contract of Sale took over 2 months to seek agreement - all the while the vendor had no commitment that they buyer was going to proceed and the purchaser had no commitment that the vendor was going to sell! From a legal perspective, neither party had any security in the transaction - they were simply luck that both were willing to transact.
On the flip side, had they signed the HOA, the transaction would have had a limited timeframe, and the deal would have been completed in a far more reasonable timeframe and with limited legal expenses.
Our HOA is used in at least 90% of all pharmacy transactions throughout Australia. It was created in association with a number of experienced pharmacy solicitors has been vetted by numerous solicitors in the course of our transactions. In most cases, where the HOA is signed the transaction is completed efficiently and within 3 months.
If you're looking to sell a pharmacy, it is important that you consider how you will manage the settlement process. A HOA is a commonly accepted and regularly used document to seek formal agreement to a sale in the early stages of settlement. As a vendor remember that your solicitor will play an important role in assisting you with the sale, but they are not incentivised or remunerated based on the outcome. A business broker is.
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