Do I need Heads of Terms?

In a business or share sale, the heads of terms set out the road map of the transaction and the key commercial terms.

What are Heads of Terms?

Heads of terms (also known as letters of intent or memoranda of understanding) are a short document between a buyer and seller in a business or share sale which set out the main terms of the transaction. 

Key features of heads of terms are:

• They are generally not legally binding, save for certain provisions such as confidentially and exclusivity clauses;

• They will set out the main commercial terms of the transaction such as details of what is being acquired, the purchase price and deal structure;

• An outline of the transaction timetable and obligations of the parties during the negotiations is often provided;

• There may be some general legal principles agreed such as that the sale and purchase agreement is to include certain warranties and a tax covenant; and

• Often they will include a binding clause that the sellers will not sell the business or shares to a third party for a certain period (known as exclusivity).

Are they needed?

Whilst neither legally binding nor a legal requirement of a transaction, it can help the transaction run smoother to have the key commercial terms agreed in principle before the parties commit costs and time to the deal.

Once principles have been agreed in the heads of terms it can be difficult from a negotiating perspective to diverge from these. Therefore, it is important that the parties discuss the proposed heads of terms with their respective legal advisors before signing up to heads of terms.

If you or your business require information regarding anything in this blog or generally about your business or any other corporate matter, please call Andrew Ward, our Corporate Associate Solicitor, on 01384 340573 or e-mail Andrew at award@georgegreen.co.uk for advice and assistance.