Heads of Terms

Heads of terms are commonly used during business sales and acquisitions to record the principal commercial terms that the buyer and seller have discussed.

They provide a framework for the transaction before the parties invest significant time and cost in detailed legal documentation.

Although heads of terms are often described as non-binding, this does not necessarily mean that every provision within them is legally ineffective. Their wording and the circumstances of the transaction matter.

What Are Heads of Terms?

Heads of terms are a written summary of the main terms agreed or proposed between the parties to a transaction.

They may also be referred to as heads of agreement, a term sheet, memorandum of understanding or, in some transactions, a letter of intent. The terminology varies and the legal effect depends on the document itself.

They are normally produced before the final sale and purchase agreement is signed.

Why Use Heads of Terms?

A business sale can involve extensive legal, financial and commercial work. Heads of terms help establish whether the parties have reached sufficient commercial alignment to justify proceeding.

They can help clarify:

• Who is buying and selling.
• What is being sold.
• The proposed purchase price.
• How consideration will be paid.
• The proposed transaction structure.
• Key conditions.
• Expected timescales.
• Exclusivity arrangements.
• Confidentiality obligations.

Agreeing these points early can reduce the risk of significant disagreements emerging later.

Purchase Price

The purchase price is normally one of the most important terms.

However, the document should make clear whether the figure is:

• A fixed amount.
• Subject to completion accounts.
• Subject to a locked-box mechanism.
• Subject to an earn-out.
• Partly deferred.
• Dependent on another condition.

A headline figure without an explanation of the underlying payment structure may not provide a complete picture of the deal.

Transaction Structure

The heads of terms should identify whether the proposed transaction is an asset sale, share sale or another structure.

This is important because the structure affects what is transferred and how liabilities, contracts and other matters are dealt with.

For more information, see Asset Sale vs Share Sale.

Assets and Liabilities

Where the transaction involves assets, the parties should identify the principal assets expected to be included and any significant exclusions.

The parties should also consider how liabilities will be treated.

For example, an asset transaction may distinguish between liabilities retained by the seller and liabilities assumed by the buyer.

Timing and Conditions

Heads of terms may include an anticipated timetable for the transaction.

This can include:

• Completion of due diligence.
• Negotiation of definitive agreements.
• Financing.
• Regulatory approvals.
• Third-party consents.
• Target completion date.

A timetable is usually an objective to work towards rather than a guarantee that completion will occur on a particular date.

Exclusivity

A buyer may request a period during which the seller agrees not to negotiate with competing buyers.

This is often called an exclusivity or lock-out period.

The duration and terms should be considered carefully because exclusivity can restrict the seller's ability to pursue alternative offers.

Confidentiality

Confidentiality is particularly important when commercially sensitive information is being exchanged.

The parties may have a separate non-disclosure agreement or include confidentiality provisions within the transaction documentation.

For a detailed guide, see NDAs and Confidentiality.

Due Diligence

Heads of terms should normally make clear that the proposed transaction remains subject to satisfactory due diligence where appropriate.

Due diligence can cover financial, legal, commercial, tax, employment, technology and regulatory matters.

A buyer should avoid assuming that signing heads of terms means the transaction is guaranteed to complete.

Binding and Non-Binding Provisions

This is one of the most important aspects of heads of terms.

The commercial terms may be expressly stated to be non-binding, while specific provisions such as confidentiality, exclusivity, costs or governing law may be intended to have legal effect.

The document should therefore state clearly which provisions are intended to be binding and which are not.

If there is uncertainty, the parties should obtain legal advice before signing.

Negotiating Heads of Terms

Heads of terms are an important negotiation stage because changes made here can affect the detailed transaction documents later.

Both sides should consider the commercial implications of:

• Purchase price.
• Payment structure.
• Transaction structure.
• Assets and liabilities.
• Warranties.
• Indemnities.
• Earn-outs.
• Exclusivity.
• Completion conditions.
• Transition arrangements.

A seller should avoid accepting attractive headline terms without understanding the obligations attached to them.

Common Mistakes

• ❌ Treating heads of terms as a simple formality.
• ❌ Failing to distinguish binding and non-binding provisions.
• ❌ Agreeing a price without defining the payment structure.
• ❌ Ignoring the transaction structure.
• ❌ Agreeing excessive exclusivity.
• ❌ Failing to identify important conditions.
• ❌ Starting detailed legal work before resolving fundamental commercial issues.
• ❌ Signing without appropriate professional review.

Heads of Terms Checklist

• ✔ Identify the buyer and seller.
• ✔ Describe the business or shares being acquired.
• ✔ State the proposed purchase price.
• ✔ Explain the payment structure.
• ✔ Identify the transaction structure.
• ✔ Identify significant assets and liabilities.
• ✔ Set out key conditions.
• ✔ Establish an indicative timetable.
• ✔ Consider exclusivity.
• ✔ Address confidentiality.
• ✔ Clarify due-diligence requirements.
• ✔ Identify which provisions are binding.
• ✔ Identify governing law where appropriate.
• ✔ Obtain appropriate legal advice before signing.