Heads of terms in a business sale
What goes in, what actually binds you, why exclusivity is the clause to negotiate hardest, and what sellers most often leave out.
Heads of terms are the short document that sets out what has been agreed in principle before the lawyers start drafting. They are usually a few pages, usually described as non binding, and they decide more of the deal than most sellers realise.
By the time the share purchase agreement appears, the commercial argument is largely over. It was had here.
What is binding and what is not
Heads of terms are mostly a statement of intent, with a few clauses that genuinely bind.
What actually goes in
- The price, and how it is calculated
- What is paid on completion and what is deferred or conditional
- Whether it is a share sale or an asset sale
- How cash, debt and working capital are treated
- Any earn out, and how it is measured
- Conditions to completion
- What you do afterwards, and for how long
- Exclusivity, and how long it runs
- Confidentiality
- Who bears costs if it falls apart
The bit that has teeth
Most of that list is intent. A few clauses bind you from the day you sign, and exclusivity is the one that matters.
Exclusivity means you stop talking to anybody else for an agreed period, typically six to twelve weeks. From that moment your leverage is gone. Every problem the buyer finds in diligence is discussed with you unable to walk away to another party, and both sides know it.
Which is why the negotiation to have is not only about price. It is about how long exclusivity runs, what it is conditional on, and what happens if the buyer changes the terms afterwards.
Been offered heads of terms? The price is rarely the clause that costs you. We will look at the whole document before you sign anything.
Talk to usWhy they decide more than people expect
Three reasons.
Anchoring. Once a number is written down it becomes the thing everything else adjusts from. Arguing it up later is far harder than getting it right now.
Silence becomes agreement. Anything not covered gets resolved during drafting, and the party with more momentum wins those. Usually the buyer.
Exclusivity removes the alternative. A seller with two interested parties negotiates differently from one with none. Signing converts you from the first into the second.
What sellers most often leave out
- The working capital mechanism. Vague here means argued later, and it moves real money
- What conditions completion is subject to. Funding, consents, landlord approval, a key customer confirming
- What the buyer must do during exclusivity. Diligence that never starts is a way of running down your clock
- Break provisions. If they walk for no reason, do they cover your costs
- Restrictive covenants. What you cannot do afterwards, for how long, and over what area
Before you sign
Have a corporate solicitor read it. Not afterwards, before. It is a short document and reviewing it is inexpensive relative to what it determines.
And be clear what you are giving up. Exclusivity is worth something, so it should be traded for something: a shorter period, a deadline for diligence to start, or a contribution to costs if they walk away.
This page is not legal advice. A template signed without advice is how sellers get caught, so take the document to a corporate solicitor rather than working from a precedent you found online.
Answered.
Are heads of terms legally binding?
Mostly not, but not entirely. Exclusivity, confidentiality, costs and governing law usually are. The commercial terms, price, structure and timetable, are normally expressed as intent and can change during diligence.
How long should exclusivity last?
Six to twelve weeks is common. Shorter is better for you, and it is reasonable to ask for it to be conditional on the buyer actually progressing diligence rather than simply holding you off the market.
Can the price change after heads of terms?
Yes, and it frequently does. Buyers reduce price after diligence for things they discover, which is why preparation beforehand matters and why the completion payment should be an outcome you would accept even if the rest moves.
Do I need a solicitor for heads of terms?
Yes, and before signing rather than after. It is a short document, the review is inexpensive, and it is the point at which the commercial shape of the deal is set.
Have someone read the whole document
The price is rarely the clause that costs you. Talk to us before you agree exclusivity, not after.
Talk to us