Agreeing a purchase of a business is a complicated process. There will be numerous key points and outline positions agreed between the parties, in addition to the obvious negotiation of the purchase price, before a handshake takes place.
It is in the heads of terms that these key points and outline positions are documented and, generally, the heads of terms is the first corporate document to be drafted in the transaction.
Heads of terms are often also referred to as letters of intent, letters of potential interest, term sheets, heads of agreement, protocol and memoranda of understanding but, essentially, they all mean the same thing and serve the same purpose.
Although every buyer would have a rough idea of what went into drafting a set of heads of terms, they might not be aware that they are not fully legally binding documents. Once signed, a seller is not obligated to complete the transaction with the buyer. The heads of terms are merely a list, focusing the parties on the main points of agreement in the negotiations up to that point. However, that being said, they may contain legally binding sections.
Commonly, heads of terms include:
- Details of the parties;
- Details of what is being bought;
- A target date for completion;
- The structure of the purchase price and any adjustments;
- Whether the purchase is based on any key assumptions;
- Reference to the production of definitive acquisition documentation and what that will include;
- Whether the sellers are agreeing to any restrictive covenants;
- The outline positions on employees and property; and
- Legally binding provisions such as confidentiality, exclusivity, third parties, costs and governing law and jurisdiction.
For more information on heads of terms, or corporate law in general, please do not hesitate to contact EHL’s business law department on 0800 999 8880.
The information provided in all of our blogs reflects only a narrative of some elements to consider on the topic. The blogs do not contain considered legal advice and should not be relied upon as advice. Please see our website terms and conditions for full details of our disclaimer. If you are interested in obtaining advice, please contact one of our solicitors who will be happy and able to advise you on your own particular circumstances.