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Are heads of terms in a business sale important?

The Importance of Heads of Terms in a Business or Share Acquisition/Sale

The Heads of Terms is the document used at the start of a commercial transaction to set out the main terms of the agreement between the parties before due diligence is carried out and substantive drafting takes place.

Although Heads of Terms are non-binding (except where otherwise stated, for example in relation to confidentiality obligations), they should considered to:

  1. provide both parties (and also third party advisors such as solicitors and accountants) with a summary of terms agreed, which will hopefully lead to a swift conclusion of the transaction;
  2. try and avoid ongoing or protracted negotiations as to the terms of the transaction, as once the Heads of Terms are in place it is often difficult to overturn the terms in them; and
  3. confirm those obligations agreed between the parties which are intended to be legally binding (for example confidentiality obligations and/or any exclusivity period that may apply).
Whilst it is often useful for parties to prepare and enter into Heads of Terms, this is not necessarily the case for low value and/or more straightforward transactions, where the parties would be better off drafting the transactional documents straight away.

What to include or look out for in the Heads of Terms

If you intend to enter into a Heads of Terms before proceeding with a share or business acquisition/sale transaction, you should ensure the following main points are included (amongst others):

  1. Details of the shares or assets being acquired – Depending on whether the transaction is a share or business acquisition, the Heads of Terms should clearly set out what is actually the subject of the transaction (ie. what shares or business assets are being acquired). 
  2. Price and payment – You will need to check that the purchase price, and how this is intended to be paid (for example in one lump sum at completion, or by a series of deferred payments following completion), is adequately covered, including any adjustments to the purchase price (for example in a share transaction, is the transaction on a cash free/debt free basis?).
  3. Due diligence – The buyer should ensure a clause is included setting out that the transaction is subject to it carrying out its own legal and financial due diligence on the target business or company.
  4. Handover period – If the parties intend for the seller to continue assisting the target company or business following completion, and be paid for providing such services, then a term to this effect should be included in the Heads of Terms.
  5. Confidentiality/Exclusivity period – If it is important to the parties that the transaction remains confidential between them (and their professional advisors), and the parties agree that the seller shall not enter into negotiations with another interested third party buyer, then these provisions should be included. With regards to confidentiality, the parties may prefer to enter into a separate Confidentiality Agreement if this is of particular importance to the parties. Again these obligations should be expressly stated as intended to be legally binding in the Heads of Terms if the parties intend to rely upon these provisions.

Next steps

If you require any further information or advice on the above, or require assistance preparing or reviewing Heads of Terms for a share or business acquisition/sale, please do not hesitate to contact Scott Richardson on 01329 227907 or by email on [email protected].

The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute, legal advice, and should not be relied upon as advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article. All content was correct at the time of publishing. Legal advice should always be sought in relation to specific circumstances.