Heads of terms
Heads of terms set the commercial and procedural framework for the deal. Whether any part is legally binding depends on the wording, not on the title at the top of the page.
What they are
A document in which buyer and seller record the main terms of the deal before due diligence. In the UK it is usually called heads of terms, and sometimes a letter of intent, heads of agreement or a memorandum of understanding. Private equity buyers often send a letter of offer first, which is then turned into agreed heads.
Heads of terms are normally marked "subject to contract" and do not oblige either side to buy or sell. Some clauses, however, are meant to bind immediately. The document must say clearly which clauses are binding and which wait for the share purchase agreement.
What binds and what does not
| Clause | Usual treatment | What to clarify |
|---|---|---|
| Price and structure | Not binding, subject to contract | Assumptions, adjustments and grounds for change |
| Obligation to complete | Excluded | Express wording and outstanding conditions |
| Exclusivity | Binding if agreed | Length, scope and how it ends |
| Confidentiality | Binding | Which NDA applies and any exceptions |
| Costs | Binding if agreed | Who pays what, caps and break costs |
| Timetable | Depends on the wording | Milestones and consequences of delay |
| Governing law and jurisdiction | Binding | Especially important with an overseas buyer |
This table describes common practice, not a legal rule. A corporate lawyer should review the whole text so that what binds matches what both sides intend.
What to pin down before you sign
The heads should cover, with enough precision, the points that drive value and risk:
- Price and its basis. Enterprise value or equity value, with the definitions of net debt and normalised working capital that will apply.
- Completion mechanism. Completion accounts or a locked box, and the locked box date if that is the choice.
- How much is paid at completion. The share paid in cash on the day, and what is deferred, retained, held in escrow or contingent.
- Earn-out, if any. Exact metric, period, who calculates it and how much control you keep. Leaving it all to the share purchase agreement weakens your position.
- Rollover. If a private equity buyer wants you to reinvest, the percentage and the terms of the new shares.
- Your role. How long, how much time, what duties and what pay.
- Restrictive covenants. Scope and length of any non-compete and non-solicit.
- Perimeter. What is in and what is out: property, cars, shares in other companies.
- Warranty and indemnity approach. Whether the buyer intends to rely on W&I insurance, and the broad level of any liability cap.
- Conditions to completion. What must happen first: buyer funding, regulatory approvals, consent from customers with change of control clauses.
Exclusivity in particular
Exclusivity removes your alternatives for the agreed period, typically four to eight weeks on an SME deal and longer on complex ones. It should match a defined due diligence scope, timetable and level of commitment.
To limit the risk of delay or a renegotiated price:
- A proportionate period. Matched to the scope of the review, with extensions only by express written agreement.
- A timetable in the heads. Start date, initial request list, review milestones and a target date for signing.
- Evidence of funding. The buyer should show how it will pay before you grant exclusivity, and explain any funding conditions.
- Early termination. Exclusivity should end if the buyer misses the timetable or materially changes the terms.
How to compare several offers
If you receive more than one offer, do not compare them on headline price alone.
| Criterion | What to look at |
|---|---|
| Cash at completion | The amount that reaches your account on the day |
| Certainty of completion | Whether funding is committed or still to be raised |
| The buyer's track record | Team, advisers, references and ability to run the process |
| Conditions | The more there are, the higher the risk of not completing |
| What it asks of you | Tie-in period, restrictive covenants, rollover, personal guarantees |
| Plans for the company | Matters if you are staying on, and for your team and customers |
There is no best offer in the abstract. Compare the expected value and the worst case: cash at completion, funding, adjustments, contingent consideration, retentions, conditions and future obligations.
The legal position in England and Wales
English law has no general duty to negotiate in good faith, and an agreement to negotiate is generally not enforceable. A lock-out (exclusivity) agreement for a defined period can be enforced, as the House of Lords held in Walford v Miles [1992]. Marking a document "subject to contract" usually prevents a binding contract, but the courts look at the whole picture, including the parties' conduct afterwards. Scottish companies and Scots law have their own rules. Get legal advice before signing exclusivity or any cost commitment.
Frequently asked questions
Do I need a lawyer for heads of terms?
It is strongly advisable. Heads can fix exclusivity, price mechanics, conditions and costs with legal or practical effect. A corporate lawyer's review before signing makes sure the wording matches what you intend, and sets up the share purchase agreement negotiation.
Can I sign heads with two buyers at once?
Only if neither gives exclusivity. In a competitive process you can keep several parties in play until you choose one offer, and then agree exclusivity with that buyer for a proportionate period.
What if I change my mind after signing?
It depends on the text. The sale itself is usually not binding, but exclusivity, confidentiality and any cost provisions may be, and your adviser's engagement letter may have consequences too. Read the document with your lawyer before you withdraw.
