What is included in the Heads of Terms?
The Heads of Terms document (Heads) is also referred to as a Letter of Intent (LOI) document
This is the document which outlines the key terms of the deal before moving to a legal/contractual position as defined in the Sale & Purchase Agreement (SPA) drawn up by the buyer’s lawyers.
The Heads document is presented by the buyer to the seller via their advisers and contains a number of key areas around the deal. Essentially, the more comprehensive, the better on the basis that this will form the key content of the SPA in due course. Details to cover need to include the following key aspects:
- the total price offered for the business;
- the percentage of shares being acquired
- the corresponding price per share
- any specific price per share relating to the future sale of any shares retained by existing owners on completion of the transaction
- the maintainable ebitda level on which the price is calculated;
- the structure of how the purchase price is to be settled ie how much to be paid on completion date
- the amount of deferred consideration and the payment profile over the life of the deferred period ie how much is to be paid each quarter/year thereafter until settled
- any earn out provisions. These are amounts to be paid over and above the initial purchase price and determined by achievement of future milestones/profit targets/sales performance, etc
- the specific earn out milestones, whether ebitda/profit, KPIs, turnover, new market penetration, etc
- details of the respective role for any remaining shareholders and any corresponding salary/compensation for carrying out that role
- the exclusivity period to be applied by the buyer to enable the buyer to move the transaction forwards to due diligence and funder search, normally 90-120 days duration
The Heads are normally non-binding.
