Heads of terms for a business sale are not, as a whole, legally binding. They record what a buyer and seller have agreed in principle, and the binding obligation to buy and sell only arises when the share purchase agreement or asset purchase agreement is signed. The exceptions matter a great deal, because confidentiality, exclusivity and costs provisions in the same document are usually intended to bind from signature, and an English court decides which is which objectively, on what the parties wrote and did, not on what either of them privately assumed.
This article is about heads of terms on the sale or purchase of a business or a company. The same phrase is used on commercial leases, where the drafting conventions and the commercial points are completely different. If a lease is what you are negotiating, our commercial property team deals with that separately. Everything below assumes an owner-managed company or trading business changing hands.
We act for buyers and for sellers on these deals, often on transactions where the two sides are advised by firms of very different size. The pattern we see most often is not a bad set of heads of terms. It is a thin one: two pages, a headline price, no basis for that price, nothing on the cap, nothing on the timetable, and six weeks of argument four months later over points everyone assumed had been settled.
What heads of terms are, and the other names they go by
Heads of terms are a short document, typically between two and ten pages, recording the principal commercial terms of a proposed sale before the lawyers start drafting. They are signed at the end of the negotiating stage and before due diligence begins in earnest, so that both sides are spending money against an agreed shape of deal rather than an assumed one.
The same document goes by several names, and the name carries no legal significance in England and Wales:
- Heads of agreement, used interchangeably with heads of terms.
- Letter of intent, or LOI, more common where a United States buyer, funder or adviser is involved.
- Memorandum of understanding, or MOU, more common on cross-border deals and in joint venture contexts.
- Term sheet, more typical of investment and funding rounds than of a straight trade sale, although buyers from a private equity background often use it.
- Offer letter or indicative offer, usually a shorter and earlier document, sometimes followed by fuller heads once the offer is accepted.
A court will look at what the document says and how the parties behaved, not at the heading at the top of page one. In one Court of Appeal case the document in question was called a side letter, and the analysis was exactly the same as it would have been for anything labelled heads of terms.
Three things make them worth the time. They flush out disagreement before either side has paid for due diligence and drafting. They give the drafting solicitor a brief, which shortens the first draft of the sale agreement considerably. And they give funders and boards something concrete to approve, which on management buy-outs and buy-ins is often what unlocks the credit process.
Which parts of heads of terms are legally binding
The commercial terms are not binding. The protective terms are. A properly drafted set of heads says so expressly, in a status clause, and is marked subject to contract. The table below shows how the split usually falls on an SME business sale.
| Provision | Usual status | Why |
|---|---|---|
| Confidentiality and restrictions on announcements | Binding | Worthless if it only takes effect on completion. It has to bite from the moment information changes hands. |
| Exclusivity, also called a lock-out | Binding | A promise not to negotiate with anyone else for a stated period. Enforceable because it is a negative obligation with a defined end date. |
| Restrictions on approaching staff, customers and suppliers during negotiations | Binding | Protects the seller against a buyer who uses the process to poach rather than to buy. |
| Costs, and any break fee | Binding | Normally each side bears its own costs. If anything different is agreed, it only works if it is binding. |
| Governing law and jurisdiction of the heads themselves | Binding | Needed so that any dispute about the binding clauses is decided somewhere predictable. |
| The status clause, saying which parts bind and which do not | Binding | This is the clause that makes the whole split work, so it has to be binding itself. |
| Purchase price and the basis on which it is calculated | Not binding | Agreed in principle. The price only becomes an obligation under the sale agreement. |
| Deal structure, share sale or asset sale | Not binding | Frequently revisited once tax advice and due diligence findings are in. |
| What is included and what is excluded | Not binding | Due diligence routinely changes the asset list, so this is a statement of intent. |
| Payment terms, deferred consideration, earn-outs and retentions | Not binding | The mechanics are built in the sale agreement. The heads set the shape only. |
| Warranties, indemnities and limitations on the seller’s liability | Not binding | Cannot be finalised before disclosure, but the headline parameters should still be recorded. |
| Conditions to completion, such as landlord’s or regulatory consent | Not binding | They become contractual conditions in the sale agreement, not before. |
| Restrictive covenants on the seller after completion | Not binding | Need careful drafting against the facts, which is a sale agreement job. |
| Timetable and target completion date | Not binding | A plan, not a deadline. No remedy attaches to missing it. |
Nothing in that table is automatic. The status of each clause comes from what the document says about it, which is why the status clause does more work than any other provision in the document.
How the split is made clear in the document
Three mechanisms, used together rather than in the alternative:
- A status clause. Wording to the effect that, save for the clauses listed, the document records the parties’ present intentions only and is not intended to create legally binding obligations. The listed clauses are then stated to be binding on signature.
- The words subject to contract, on the front page and repeated in the body. In the Court of Appeal case of Generator Developments Ltd v LIDL UK GmbH [2018] EWCA Civ 396, every draft of the heads of terms carried the words Subject to Contract in a box on the first page and repeated them in two separate sections. That is the standard to aim at, not an excess of caution.
- Consistency afterwards. Keeping subject to contract on the covering emails, the revised drafts and the meeting notes that follow. The label is only worth what the parties’ later conduct leaves it worth.
Subject to contract, and the point most guides leave out
Subject to contract is strong protection, but it is not permanent. In RTS Flexible Systems Ltd v Molkerei Alois Muller GmbH & Co KG [2010] UKSC 14 the Supreme Court confirmed that whether there is a binding contract depends not on the parties’ subjective state of mind but on what was communicated between them by words or conduct, judged objectively (paragraph 45). It then confirmed that an agreement expressed to be subject to contract can become legally binding if the parties later agree to waive that condition, although the court will not lightly reach that conclusion (paragraphs 55 and 56).
On the facts, the Supreme Court held the parties had waived it. The price had been agreed, a significant amount of work had been carried out, and a variation to the deal had been agreed without anyone suggesting the variation was subject to contract. The court’s conclusion was that any other reading made no commercial sense (paragraph 86).
The practical lesson for a business sale is simple. Do not start behaving as though the deal is done. Letting a buyer take over supplier relationships, move its own people in, take the keys to the premises or collect customer receipts while the sale agreement is unsigned is precisely how a non-binding document stops being non-binding. If the buyer genuinely needs to be inside the business early, that should be documented deliberately, usually by a short management or transitional services agreement that says what it is, rather than left to be inferred.
Why a promise to negotiate in good faith adds nothing
A clause saying the parties will negotiate the sale agreement in good faith is not enforceable in English law, and nor is an agreement to agree. In Barbudev v Eurocom Cable Management Bulgaria EOOD [2012] EWCA Civ 548 a side letter issued alongside a share sale recorded that the buyer would offer the seller the opportunity to invest in the merged business on terms to be agreed, and that the parties would negotiate that investment agreement in good faith. The Court of Appeal held the letter was no more than an agreement to agree and was unenforceable, following the House of Lords decision in Walford v Miles (paragraphs 44 and 46).
The same judgment is a clean illustration of the binding and non-binding split. The court accepted that the parties plainly intended the confidentiality obligations in that same letter to be contractually enforceable between them, whatever the status of the rest of it (paragraph 37). One document, two different legal effects, decided clause by clause.
So if you want protection while the deal is negotiated, you get it from an exclusivity clause with a defined end date and from confidentiality obligations that bite immediately. You do not get it from good faith wording, and a seller who has been told that a good faith clause means the buyer cannot walk away has been told something that is not correct.
The trap where the business comes with property
Most owner-managed businesses being sold come with premises, whether a freehold, a lease to be assigned or a new lease to be granted. Section 2(1) of the Law of Property (Miscellaneous Provisions) Act 1989 provides that a contract for the sale or other disposition of an interest in land can only be made in writing, incorporating all the terms the parties have expressly agreed in one document, or in each where contracts are exchanged, and section 2(3) requires that document to be signed by or on behalf of each party.
A detailed, signed set of heads of terms that sets out the property terms in full and is silent on its own status is uncomfortably close to satisfying those requirements. Marking it subject to contract is what keeps it on the right side of the line, which is the origin of the convention in the first place.
The point cuts the other way on a share sale. Shares are not an interest in land, so none of that formality applies, and there is no statutory backstop protecting a seller who has been careless about wording. If anything, the discipline matters more on a share sale than on an asset sale, not less.
Generator Developments v LIDL also shows what the subject to contract label costs you as well as what it buys. The claimant had worked on a joint bid for a development site, spent time and money, and then lost the site when the other party exchanged alone. Its equitable claim failed. As the Court of Appeal put it, it cannot be unconscionable to exercise a right which has been expressly reserved to both parties by means of the subject to contract formula (paragraph 85). The protection is mutual. The other side can walk away too.
What should actually be agreed in the heads of terms
The test for whether something belongs in the heads is not how legal it sounds. It is whether leaving it open hands the other side leverage later. Once exclusivity has been granted and due diligence has started, the seller’s negotiating position weakens steadily, and anything left vague tends to be resolved in the buyer’s favour. The list below reflects where we see deals come unstuck.
Price, and the basis on which it is calculated
The headline number is the easy part. The basis is what causes the arguments. Record whether the price is an enterprise value or an equity value, whether it assumes the business is transferred cash free and debt free, what counts as debt, and what level of normalised working capital the business is expected to carry at completion. On an owner-managed company, directors’ loans, invoice finance facilities, hire purchase agreements, accrued holiday and deferred VAT all have to be allocated to one side of that line or the other.
Record also how the price will be tested: completion accounts or a locked box. These are two very different risk allocations and deciding between them in month four, after the buyer’s accountants have seen the management information, is deciding it from a weak position.
Share sale or asset sale
State which it is. The choice drives the tax position for both parties, which liabilities move, whether third-party consents are needed, whether TUPE applies and how long the transaction takes. Our guide to share sales and asset sales sets out how the two compare. Tax treatment depends entirely on the structure and on each party’s own circumstances, so both sides should take that from their accountant or tax adviser rather than from the other side’s assumption.
What is included, and what is not
On an asset sale this is the heart of the document. On a share sale it still matters, because sellers routinely intend to extract something before completion. Cover the trading assets, stock, work in progress, contracts, intellectual property, the trading name, domains and social accounts, customer data, plant and vehicles, and the premises. Then cover what is excluded: surplus cash, property to be retained and leased back, a vehicle, a policy, a piece of equipment the seller is keeping. Finally cover what happens to debt, overdrafts, invoice discounting and any personal guarantees the seller has given, because a seller who completes without having those released has not finished.
How and when the money is paid
Split the consideration out: cash at completion, deferred consideration, any earn-out, any retention or escrow, and any shares or loan notes in the buyer. Where there is an earn-out, the heads should go further than naming one. At a minimum, record the metric, the measurement period, and who controls the business during that period, because an earn-out measured on a profit figure the buyer alone can influence is the single most frequently litigated feature of SME deals.
Exclusivity
Exclusivity is a lock-out: a promise by the seller not to negotiate with, solicit or provide information to anyone else for a defined period. It works, where a good faith clause does not, because it is a negative obligation with a stated end date. The heads should state the period, when it starts, exactly what the seller must not do, any carve-outs for approaches the seller cannot control, and that the clause is binding. Four to twelve weeks is the usual range on an SME deal, and a buyer asking for open-ended exclusivity is asking for something a seller should not give. Exclusivity agreements when buying a business covers the drafting in more detail.
Confidentiality
There is usually a non-disclosure agreement in place already. The heads should either incorporate it by reference or restate the obligations, and should deal with announcements, internal communications and approaches to staff, customers and suppliers. For a business whose value sits in its customer relationships, this is the clause that protects the thing being sold.
Conditions to completion
List them and allocate them. The usual candidates are landlord’s consent to assignment or to a change of control, bank and funder consent, change of control consents under key customer and supplier contracts, regulatory approval or registration, shareholder or board approval, and any pension issue. For regulated businesses the timetable is driven by the regulator rather than by the parties, which is why our guides to buying a dental practice and to legal due diligence when buying a business treat consents as a workstream of their own. Say who carries the risk if a condition is not satisfied, and whether either party can walk away without cost if it is not.
The timetable
Target dates for the first draft of the sale agreement, for completion of due diligence, for exchange and for completion, together with who is producing which documents. Where the deal is an asset sale, or a share sale involving a business transfer, the timetable has to allow for employee information and consultation: regulation 13(2) of the Transfer of Undertakings (Protection of Employment) Regulations 2006 requires affected employees’ representatives to be informed long enough before the transfer to allow consultation to take place. That obligation does not flex to suit a completion date. See TUPE when buying or selling a business and, for realistic expectations overall, how long it takes to sell a business.
How the deal is funded
Say where the money is coming from: cash reserves, bank debt, asset-based lending, a vendor loan, private equity, or a combination. If the deal is conditional on funding, say so, because an unstated funding condition is the most common reason a timetable slips. A seller should ask for evidence of funding before granting exclusivity, since exclusivity is the one thing the seller gives away for nothing. A buyer should be careful about committing to a timetable its lender will not meet, and about agreeing a cash-at-completion figure that leaves no headroom for the working capital the business will need the following week.
What happens to the seller and the team
Record the handover period and whether it is paid, whether the seller stays on as an employee or a consultant, and the broad shape of the restrictive covenants: duration, geography and the activities covered. Covenants are frequently the last thing argued about and the easiest thing to settle early, because at heads stage the seller is not yet thinking about what they will do next and the buyer has not yet become anxious. Where key staff are central to value, deal with retention arrangements too, and take employment advice on anything that changes an existing contract.
What is better left to the main agreement
Heads of terms are not a short form sale agreement, and trying to make them one is counterproductive. Anything that cannot sensibly be settled before due diligence has been done will simply be negotiated twice: once badly, on no information, and again properly later. The dividing line we work to looks like this.
| Settle in the heads of terms | Leave to the sale agreement |
|---|---|
| Price, and the basis on which it is calculated | The warranty schedule itself, clause by clause |
| Share sale or asset sale | Indemnity wording and the tax covenant |
| Completion accounts or locked box | The completion accounts policy and the accounting hierarchy |
| Earn-out metric, period and who runs the business during it | The earn-out protections and the dispute mechanism |
| Cap on the seller’s aggregate liability, and the long-stop dates for claims | De minimis thresholds, baskets and the conduct of claims provisions |
| Whether warranty and indemnity insurance is contemplated, and who pays | The policy, the underwriting process and the knowledge scrape |
| Which conditions have to be met, and who carries the risk if they are not | The conditions precedent drafting and the termination rights |
| Length of the seller’s handover and the shape of the restrictive covenants | The drafting of the covenants and the service or consultancy agreement |
The row that surprises people is the liability cap. Caps, long-stop dates and the question of whether warranty and indemnity insurance is in play feel like legal detail, and most heads of terms say nothing about them. That is a mistake for a seller. Once the buyer has spent six weeks and a five-figure sum on due diligence, a seller raising a cap for the first time is asking for a concession rather than confirming an agreed position. Recording the headline limitations at heads stage costs nothing and changes the negotiation entirely. The mechanics of warranties and indemnities and of the disclosure letter can wait. The parameters cannot.
What vague heads of terms cost later in the deal
These are the failures we see repeatedly, and what each one costs.
- A price with no stated basis. Agreed at a round number, then fought over at the completion accounts stage because nobody said whether it was cash free and debt free, or what normalised working capital meant. On a deal in the low millions the gap is routinely six figures.
- Silence on the liability cap. The seller discovers in the second draft of the sale agreement that the buyer expects liability up to the full purchase price, with long claim periods, and has no leverage left to change it.
- An earn-out agreed in principle only. No metric, no measurement period, no protection over how the business is run during it. This is the most common source of post-completion litigation on SME deals and the most avoidable.
- Exclusivity without an end date, or without being stated to be binding. Either it is unenforceable or it is indefinite. Neither is what the parties meant.
- No timetable. Deals that drift tend to die. Nothing in the heads is a deadline, but a timetable gives both sets of advisers something to be measured against, and it exposes a buyer who is not actually ready.
- An unallocated condition. Landlord’s consent, a regulatory registration or a change of control consent that nobody owned until the final fortnight, at which point it becomes a stand-off about who pays for the delay.
- Nothing on personal guarantees. A seller who has guaranteed the company’s lease, overdraft or equipment finance needs those released as a condition of completion, and a buyer who has not budgeted for replacing them will resist doing it at the end.
The common thread is leverage. Heads of terms are signed at the point of maximum seller leverage, when the buyer wants the deal and has not yet spent anything. Every point left open is a point that will be decided later, when the position has reversed. That is the real argument for spending a day on them rather than an hour.
How we approach heads of terms
We draft and negotiate heads of terms for buyers and for sellers, and the work is the same either way: identify the points that are expensive to reopen, settle them while they are still cheap, and make absolutely certain the document says what it binds and what it does not. On the buy side that usually means a tight exclusivity period, a clearly conditional structure and a realistic timetable. On the sell side it means the price basis, the cap and the guarantee releases, agreed before the buyer’s advisers are through the door.
Heads of terms are also where a transaction stops being a conversation and starts being a project. If you have reached that point, our guides to selling a business and to buying a business set out the process from there, and our corporate team can work from a draft you have already been sent or produce one from scratch. Where the deal involves transferring key customer or supplier arrangements, our commercial contracts team deals with the change of control consents that tend to sit on the critical path.
Talk to us before you sign
If you have been sent a set of heads of terms, or you are about to send one, the time to look at it is now rather than after it is signed. A short review usually takes less time than a single round of correspondence later. We advise buyers and sellers on business sales across England and Wales, from first offer through to completion.
To talk it through, call us on +44 207 566 1188 or email info@gurvelegal.com. This article sets out the general legal position and is not advice on any particular transaction.
