Typically, the Heads of Terms is not legally binding in its entirety.  However, the document prepares essential groundwork for the final share purchase agreement (SPA) by setting intentions and detailing contract terms, which helps prevent misunderstandings and disputes.

What detail is included in a Heads of Terms document?

Below is a summary of the content you can expect to see in the Heads of Terms when selling your business.

1. Parties involved
   The document will begin by clearly identifying the parties involved in the transaction. This includes the legal name and addresses of the business being sold, and those of the buyer.
2. Transaction overview
   A brief overview of the transaction set outs what is being sold and what the buyer will acquire. This could involve the shares in the business, or specific trade and assets. The scope of the sale is clearly defined in a way that leaves room for further detail, to be confirmed in the final SPA.
3. Purchase price and payment terms
   The Heads of Terms will specify the agreed purchase price for the business, as well as an outline of the payment terms. This includes how much will be paid upfront, any deferred payments and, where relevant, conditions for earnouts (performance-based payments). It should also include the currency of the transaction and any financing arrangements.
4. Conditions precedent
   These are specific conditions that must be satisfied before the sale can be completed. Common conditions precedent might include regulatory approvals, due diligence, financing arrangements, and possibly the retention of key employees. These conditions help protect both parties and ensure the transaction can proceed smoothly.
5. Due diligence
   Due diligence is a fundamental phase of the selling process, during which the buyer will thoroughly investigate the business to verify its financial health, legal standing, and operational capabilities.  Along with the scope and timeline for due diligence, the Heads of Terms may specify the type of information required and the level of co-operation expected from the seller.
6. Confidentiality and exclusivity
   To protect sensitive information, the Heads of Terms will include a confidentiality clause that requires both parties to keep the transaction detail private.  In some cases the document may also contain an exclusivity clause, which prevents the seller from negotiating with other potential buyers for a specified period.  This allows the buyer appropriate time to complete due diligence and finalise the deal.
7. Warranties and representations
   This section outlines the warranties and representations each party makes about their legal and financial status. For the seller, this might include assurances about the business's financial statements, legal compliance, and ownership of assets. For the buyer, it might include assurances about their ability to finance the purchase.
8. Timetable
   A clear timeline will be defined, highlighting key milestones and deadlines in the transaction process. This is intended to keep the transaction moving forwards, while ensuring both parties are aware of their individual obligations at each stage.
9. Fees and costs
   The Heads of Terms may include provisions for fees.  It will often outline which party is responsible for the various costs incurred during the transaction, such as legal and accounting fees.
10. Governing law and jurisdiction
    Finally, the document will specify the governing law and jurisdiction applicable to the agreement. This is particularly important for international transactions, as it clarifies which country’s laws will govern the interpretation and enforcement of the terms.

Given the significance of the Heads of Terms, it is important for both the buyer and seller of a business to approach this document with careful consideration – preferably with the expertise of trusted legal and financial advisers.

Rickard Luckin can offer support by helping you negotiate the most favourable sale terms for your business.  We will also clarify the Heads of Terms in step-by-step detail, to ensure full understanding of the process and achieve a successful sale.