Buying a business - Heads of Terms
When buying a business, an initial step is to set out the principle terms of the agreement reached with the seller within a simple document known typically in the UK as the Heads of Terms (Heads).
In a simple deal this may be set out in an email whereas a complex transaction may require the Heads to be contained in a longer form.
Heads provide a strong moral commitment from each party in adhering to the agreed deal terms.
Whilst not an absolute requirement, Heads can be useful in providing the parties with clarity on the terms as agreed as well as avoiding mistaken assumptions.
Moreover, focusing on the complexities and agreeing potential deal-breaking issues at the outset, can assist in avoiding unnecessary cost and delay at a more crucial and damaging point of the deal journey.
However, the parties must be careful not to get too bogged down with the routine and entry-level terms of a deal within the Heads; jeopardising timescales and the momentum to complete.
The parties should not allow the Heads to restrict further negotiations and movement on the terms where required (for example as a result of the due diligence process) as the transaction progresses.
Heads will not usually be legally binding, but can provide for binding commitments such as confidentiality, exclusivity in the case of the buyer and the payment of costs (especially where a party withdraws prematurely from a deal).
If carefully drafted Heads can prove valuable to the buyer of a business.