Why heads of terms matter?

If you are a business owner or founder looking to exit and sell your business (or alternatively are looking to expand by acquiring another business or through receiving investment), it is invaluable that you receive sound legal advice and support to put in place appropriate heads of terms at the outset of your proposed transaction.

Heads of terms are an agreement in principle between parties, entered into at the start of a proposed transaction. This article considers the key reasons why you should put in place heads of terms (including some risks of proceeding without them).

1. Clearer framework for negotiations: you may reach earlier agreement on key transaction terms (therefore making later negotiation of transaction documents more time and cost efficient), including:
   1. the payment amount and structure (for example, payment in cash at completion or in instalments after completion and also how director loan account balances are to be settled);
   2. those terms apportioning risk between parties such as customary warranties, limitations on warranty claims and indemnities appropriate to the size and nature of the transaction. If selling, early agreement of these points can strengthen your negotiation position to remove non-customary warranties or indemnities as the transaction progresses;
   3. post-completion seller restrictions, such as non-compete obligations, non-poaching of employees and non-dealing with customers and/or suppliers;
   4. how the seller is to be involved in the business after completion. Will brief transitional assistance be provided after completion or will a more substantive employment / consultancy arrangement be required? Our specialist employment team can support you here; and
   5. pre-transaction matters that must take place, such as property or IP transfers. Our specialist teams can offer a wide range of support here too.
2. Agreed processes: in heads of terms, parties typically agree which adviser will draft certain transaction documents, the extent of due diligence to be carried out and the seller's obligation to make relevant information available.
3. Documented intention to contract and timescales: heads of terms evidence intent for the deal to take place. Often, heads of terms include a timescale for the transaction and an agreement that both parties will aim to work towards completion taking place within this timescale.
4. Buyer exclusivity: it is usual for transactional heads of terms to contain legally binding exclusivity provisions in favour of the buyer. This means during an agreed period the seller will not approach another potential buyer. This exclusive arrangement gives the buyer greater confidence to incur the time and financial costs of due diligence and transaction negotiations and shows the commitment of both parties for the proposed transaction to complete. Typically, most other provisions other than exclusivity in the heads of terms are non-legally binding – however, such terms importantly demonstrate a strong agreement to negotiate in good faith and provide early clarity and vital time and cost saving efficiencies for the transaction ahead.
5. Legal and accounting advice: the preparation and negotiation of heads of terms with sound legal and accounting advice allows you to be more well informed of the implications of key terms and receive advice to improve your negotiating position.

In the corporate team at Trowers & Hamlins LLP, we have extensive experience to prepare and negotiate heads of terms in a wide range of transactions. Please let us know if you would like to discuss how we can assist you.