Heads of Terms: Setting the Foundations for a Successful Transaction
Before contracts are drafted and due diligence begins in earnest, most business sales and acquisitions start with a document commonly referred to as Heads of Terms (also known as a Letter of Intent or Memorandum of Understanding).
Although usually expressed to be “non-binding”, Heads of Terms play a critical strategic role. When properly structured, they align expectations, reduce deal risk, and provide a disciplined framework for progressing to completion.
At Jonathan Lea Network, we ensure your Heads of Terms are commercially precise, legally robust and strategically protective — not simply a summary of goodwill.
What Are Heads of Terms?
Heads of Terms outline the principal commercial terms agreed in principle between buyer and seller, including:
- Proposed purchase price and payment structure
- Whether the deal is a share sale or asset sale
- Treatment of employees
- Key conditions (e.g. due diligence, finance, regulatory approvals)
- Exclusivity arrangements
- Confidentiality provisions
- Proposed timetable to completion
They are not usually legally binding as to the transaction itself. However, certain provisions — such as exclusivity and confidentiality — often are binding.
The document sets the tone and direction of the deal. If drafted carelessly, it can create imbalance, confusion, or unnecessary leverage for the other party later in negotiations.
Why Heads of Terms Matter More Than Many Realise
It is a common misconception that Heads of Terms are informal or “just a stepping stone”. In practice, they influence the entire transaction trajectory.
A well-drafted document:
- Reduces renegotiation risk later
- Clarifies structure before legal costs escalate
- Identifies potential obstacles early
- Aligns advisers on scope and strategy
- Demonstrates seriousness to stakeholders and funders
Conversely, vague or poorly structured Heads of Terms often result in deal drift, price chipping, or disputes during contract drafting.
Strategic Considerations for Sellers
For business owners, Heads of Terms are often the moment when commercial leverage begins to shift.
Key issues require careful positioning:
- Price mechanics — Is consideration fixed, deferred, subject to earn-out, or linked to working capital adjustments?
- Exclusivity period — How long will you be prevented from negotiating with other buyers?
- Due diligence scope — Is it proportionate, or open-ended?
- Conditionality — Is the buyer’s funding secured, or merely anticipated?
We ensure that early concessions do not undermine your negotiating position later in the process.
Strategic Considerations for Buyers
For acquirers, Heads of Terms provide the opportunity to:
- Secure exclusivity while conducting due diligence
- Define the transaction structure clearly
- Establish key protections and conditions
- Set realistic timelines and milestones
A disciplined document reduces the risk of overpaying or becoming committed to a transaction that later proves problematic.
Binding vs Non-Binding: Getting the Legal Position Right
Although most commercial terms are expressed as non-binding, certain provisions often carry legal effect, including:
- Confidentiality
- Exclusivity (lock-out arrangements)
- Costs provisions
- Governing law and jurisdiction
Poor drafting can unintentionally create binding obligations beyond what was intended. We ensure clarity on what is — and is not — enforceable.
Common Risks in Poorly Drafted Heads of Terms
- Ambiguous purchase price adjustment mechanisms
- Failure to specify deal structure (asset vs share sale)
- Overly long exclusivity without safeguards
- Inadequate protection for confidential information
- Lack of clarity around key assumptions
Addressing these issues at the Heads of Terms stage reduces friction and protects value later.
Our Role in the Process
We provide structured legal input at the outset, whether acting for buyer or seller:
- Drafting or reviewing Heads of Terms
- Stress-testing commercial assumptions
- Aligning the document with tax and structural considerations
- Ensuring enforceability where required
- Coordinating with brokers, accountants and corporate finance advisers
Our objective is not to complicate early negotiations, but to ensure they are built on a stable foundation.
A Controlled Start Leads to a Controlled Completion
Transactions that begin with clarity tend to complete with certainty. Heads of Terms are not a formality – they are the architectural blueprint of the deal. When drafted with strategic insight and legal precision, they materially increase the likelihood of a smooth and successful completion.
If you are preparing to buy or sell a business, early legal input at the Heads of Terms stage can prevent avoidable risk and strengthen your position from the outset.
Speak to Our Corporate Lawyers Today
Practical, trusted legal advice
If you are preparing to buy or sell a business, Jonathan Lea Network can assist at the critical Heads of Terms stage. Call us on 01444 708640 or email wewillhelp@jonathanlea.net to arrange an initial consultation and ensure your transaction begins on a structured and strategically protected footing.
FAQ: Heads of Terms
Yes. Even where stated to be non-binding, subsequent conduct, reliance, or poorly drafted language can give rise to binding obligations or estoppel arguments. Courts will examine substance over label, particularly where terms are sufficiently certain and parties act as if a contract exists. Exclusivity clauses are generally enforceable if they are clearly drafted, supported by consideration, and limited in duration. Uncertainty around timeframe or scope can render them unenforceable. Precision is essential to avoid disputes over competing negotiations. Break fees are more common in larger or competitive transactions. Their enforceability depends on whether they constitute a genuine pre-estimate of loss rather than a penalty. Careful structuring is required to avoid regulatory or fiduciary concerns. While Heads of Terms are not the final contract, ambiguity around price adjustments (e.g. working capital targets, earn-out metrics, locked-box dates) frequently causes renegotiation. Sufficient technical detail should be included to prevent later reinterpretation. If the document is genuinely non-binding (excluding specific clauses such as confidentiality or exclusivity), either party can usually withdraw prior to contract. However, reputational consequences, wasted costs, and potential misrepresentation exposure may still arise depending on the circumstances.
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