Heads of Terms: What to Include When Selling or Buying a UK Business

What heads of terms typically cover

Heads of terms (also called a letter of intent or term sheet) should set out: the proposed purchase price and payment structure (upfront cash, deferred consideration, earn-out); whether the deal is a share sale or asset sale; the target completion date; the scope of any seller's warranties; and whether key employees or directors are expected to remain post-completion. The more clearly these commercial points are agreed at heads of terms stage, the less likely the parties are to incur cost negotiating the same issues again during SPA drafting.

Which clauses are binding

Most of the commercial terms in heads of terms are expressly stated to be non-binding — the deal only becomes legally committed at exchange of the sale and purchase agreement. However, two clauses are typically written as binding from the outset: the exclusivity clause (preventing the seller from negotiating with other parties for a defined period) and the confidentiality clause. Directors should read these carefully before signing, as breach of either can create genuine legal liability.

Common mistakes at heads of terms stage

Sellers sometimes agree to a headline price without specifying how working capital is treated at completion, leaving scope for a buyer to argue for a significant price adjustment on a normalised working capital basis at a later stage. Buyers sometimes agree to an exclusivity period without adequate time to complete due diligence, forcing them to either rush or seek an extension. Both parties benefit from involving a solicitor and accountant before heads of terms are signed, even if the documents appear straightforward.