Heads of terms are the short document a buyer and seller sign once they agree a deal in principle. They usually run to a few pages. Most of what they say is not legally binding, which leads many owners to treat them lightly. That is a mistake. The terms you accept here become the starting point for every later negotiation, and once you sign, you usually lose the ability to talk to anyone else.
What heads of terms usually cover
- The price and how it is paid: cash at completion, deferred payments, any earn-out, loan notes, or shares in the buyer.
- What is being bought: the shares in your company or its assets. See asset sale versus share sale.
- How the price is fixed: a locked box or completion accounts, and the assumptions about cash, debt and working capital.
- Conditions: due diligence, the buyer's funding, landlord or customer consents.
- Your role after the sale: how long you stay, on what terms, and any restrictions on competing afterwards.
- Exclusivity and timetable: how long you agree not to talk to other buyers, and the target date for completion.
The binding parts
Even when the commercial terms are non-binding, a few clauses usually are: exclusivity, confidentiality, costs, and governing law. Exclusivity matters most. It is the point where your negotiating position changes, because the buyer no longer competes with anyone else.
Why the details matter now
Before you sign, you have the most leverage you will ever have. After you sign, the buyer starts due diligence, and anything they find becomes a reason to revisit the price. So the items you leave vague are the ones most likely to move against you. Three are worth pinning down in particular:
- The working capital assumption. If the level the business must be left with is not agreed, it becomes a negotiation later, and it comes off your price pound for pound.
- How much is paid at completion. A higher headline price with more deferred is not the same as a lower price paid on the day. The valuation calculator compares two offers in today's money.
- The length of exclusivity. Long enough for the buyer to do their work, short enough that a slow or uncommitted buyer cannot keep you waiting.
Before you sign
Have your own solicitor and accountant review the heads of terms, and do it before exclusivity starts. The cheapest time to fix a deal is before the buyer has stopped competing for it. The work of being ready for what comes next is set out in our due diligence checklist guide.
Common questions
Are heads of terms legally binding?
Mostly not. The commercial terms, such as the price, are usually stated to be non-binding. A few clauses are normally binding: exclusivity, confidentiality, who pays costs, and which law applies. Your solicitor will confirm which apply in your document.
What is the difference between heads of terms and heads of agreement?
In practice they are the same thing. You may also see them called a letter of intent, a term sheet or a memorandum of understanding.
Should I use a heads of terms template?
A template is a useful checklist of what to cover, but the value is in what you negotiate, not the format. Have your own solicitor review heads of terms before you sign, because exclusivity usually starts the moment you do.
General information to help you prepare, not tax, legal or financial advice. Rates and rules change; check the current position and take advice on your own circumstances.
