Once a buyer and seller have reached broad agreement on the principal terms of a business sale, the next step is often to record those points in a Heads of Terms document.
Heads of Terms — sometimes referred to as a Letter of Intent (LOI), Heads of Agreement or an offer letter — set out the main commercial terms that the buyer and seller expect the proposed transaction to follow.
They usually come before detailed due diligence and the preparation of the final Sale and Purchase Agreement.
For both buying a business and selling a business, the document is an important stage in the transaction because it helps establish whether the parties are genuinely aligned before significant time and professional fees are committed.
Heads of Terms are a written summary of the principal commercial terms agreed between a buyer and seller.
In a business acquisition, they are generally prepared once the buyer has completed its initial assessment of the opportunity and is ready to make a more formal proposal.
The document may be presented by the buyer directly or through the advisers managing the transaction.
It will usually set out matters such as:
The objective is not to produce the final legal agreement.
Instead, Heads of Terms create a framework from which the buyer's and seller's solicitors can begin preparing the detailed transaction documents.
A business sale can involve weeks or months of due diligence, financing discussions, legal work and negotiation.
Before entering that process, both sides need a reasonable level of confidence that they agree on the fundamentals of the deal.
Heads of Terms help achieve this.
For the buyer, they provide an opportunity to set out clearly what is being offered and the assumptions behind that offer.
For the seller, they make it easier to assess the overall deal rather than considering only the headline price.
This distinction is important because two offers with the same stated value can produce very different outcomes.
For example, one buyer may offer the entire purchase price in cash at completion, while another may propose a higher figure but require a substantial proportion to be deferred or dependent on future performance.
The Heads of Terms should make those differences clear.
The exact document will vary depending on the size and structure of the transaction.
However, a comprehensive Heads of Terms document for a business sale will commonly cover the following areas.
The document should state the proposed overall price for the business or shares being acquired.
Where relevant, it may also explain the basis on which the price has been calculated.
This could include reference to:
Providing this context can help reduce later disagreement about how the original offer was reached.
The Heads of Terms should identify what is included within the proposed transaction.
For a share purchase, this may include:
If the seller is retaining an equity interest after completion, the document may also address how and when those remaining shares could be sold in future.
For an asset acquisition, the parties may instead need to specify which assets, operations, contracts or parts of the business are included.
The headline value of an offer tells only part of the story.
The Heads of Terms should explain how the consideration is expected to be settled.
This may include:
Where consideration is deferred, the document should ideally explain the payment timetable.
For example:
The seller should also understand whether those later payments are guaranteed or subject to conditions.
Deferred consideration is part of the agreed purchase price that is paid after completion.
The Heads of Terms may record:
From the buyer's perspective, deferred consideration can help reduce the amount of capital needed at completion.
For the seller, however, it introduces additional risk because part of the sale proceeds will remain outstanding after ownership has transferred.
The terms therefore need careful consideration.
An earnout makes part of the consideration dependent on the business achieving agreed future targets.
These targets may relate to:
The Heads of Terms should set out the proposed earnout mechanism as clearly as possible.
That includes identifying:
This is an area where vague wording can create significant disagreements later.
If an earnout forms part of the transaction, the buyer and seller should ensure the commercial principles are understood before progressing too far into legal drafting.
The existing owner may remain involved in the company for a period after the sale.
This could be for a short handover or a longer-term operational role.
The Heads of Terms may therefore address:
This can be particularly important where the business has historically depended heavily on the seller's relationships or expertise.
Buyer and seller should have a clear understanding of what continued involvement actually means.
Buyers commonly request an exclusivity period after Heads of Terms have been agreed.
During this period, the seller generally agrees not to negotiate with alternative purchasers while the preferred buyer proceeds with due diligence, financing and legal work.
The purpose is to give the buyer greater confidence to invest time and money into progressing the transaction.
The appropriate exclusivity period will depend on the circumstances of the deal.
Rather than treating a particular timeframe as automatic, both parties should consider whether the proposed period is reasonable for the amount of work still required.
The seller should also consider what the buyer is expected to achieve during that period.
The Heads of Terms will normally state that the proposed transaction remains subject to satisfactory due diligence.
The buyer may need to investigate areas including:
Heads of Terms do not generally contain the full due diligence request list, but they may explain the scope of the review and the buyer's expectations around access to information.
It is also useful to confirm the intended structure of the acquisition.
For example:
The structure can have important implications for tax, liabilities, contracts, employees and the eventual legal documentation.
It should therefore be considered before detailed drafting begins.
The document may include an indicative timetable covering stages such as:
The timetable will generally be indicative rather than guaranteed.
However, setting expectations early can help both sides identify potential delays.
Confidentiality may already be covered by a separate non-disclosure agreement.
Even so, the Heads of Terms may confirm that information relating to the transaction remains confidential.
This can be particularly important where employees, customers, suppliers or competitors are not yet aware that the company is being sold.
The buyer may indicate that the final transaction documents will contain restrictive covenants.
These could prevent the seller from:
The detailed provisions are usually negotiated within the Sale and Purchase Agreement, but the broad principle may be identified within the Heads of Terms.
Heads of Terms are often largely non-binding, but this should not be assumed.
The commercial provisions — such as the proposed price and structure — are commonly expressed as being subject to contract.
However, particular clauses may be intended to have legal effect.
These can include:
The precise legal effect depends on how the document is drafted.
Both buyers and sellers should therefore obtain appropriate legal advice before signing Heads of Terms rather than treating them as an informal document.
In many business acquisitions, the buyer or the buyer's advisers will prepare the first draft.
That reflects the fact that the document usually records the buyer's proposed offer and transaction structure.
The seller and their advisers can then review it, challenge the terms and propose amendments.
For more complex transactions, corporate finance advisers and solicitors may both be involved in negotiating the document.
Regardless of who produces the first draft, both sides should make sure the commercial terms accurately reflect what they believe has been agreed.
There is a balance to strike.
A very short document may leave important points unresolved and simply move disagreements into the legal negotiation.
An excessively detailed document can result in the parties spending substantial time negotiating legal points before due diligence has even started.
The priority should be to make the main commercial terms clear.
As a general rule, if a matter could significantly affect:
it is sensible to address it before the parties move too far into the process.
Price is important, but the payment structure can be equally significant.
A higher offer involving substantial deferred consideration or an uncertain earnout may ultimately be less attractive than a lower offer with greater payment certainty.
If the parties already disagree about a material aspect of the transaction, postponing the discussion usually does not make the issue disappear.
Major commercial points are generally easier to resolve before exclusivity and extensive due diligence begin.
Terms such as "subject to future performance" are not sufficient.
The parties need to understand what performance means, how it will be measured and how much will become payable.
Exclusivity removes the seller's ability to progress alternative offers.
The seller should therefore understand how long the proposed period lasts and what the buyer intends to achieve during it.
Some provisions may create legal obligations.
Both sides should understand exactly what they are signing.
Once the Heads of Terms have been agreed, the transaction typically moves into a more detailed stage.
The buyer may begin or expand its due diligence.
Funding arrangements may be finalised.
Solicitors will begin drafting and negotiating the legal documentation, which may include a Share Purchase Agreement or Asset Purchase Agreement.
Issues identified during due diligence may result in further negotiations around price, warranties, indemnities or other protections.
The Heads of Terms provide the commercial framework for that process, but the transaction is not complete until the final legal documents are agreed and completion takes place.
Heads of Terms are an important milestone, but they are only one stage in the wider process of buying or selling a business.
Whether you are a buyer progressing an acquisition or a seller preparing for the next stage of a sale, you will still need to navigate areas such as due diligence, funding, valuation, legal documentation and completion.
Valius brings buyers, sellers and trusted professional advisers together in one place, helping make UK business transactions simpler, more transparent and less fragmented.
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