Two business professionals discussing heads of terms during a company sale meeting

Heads of Terms in a Business Sale (UK Guide for SME Founders)

Levi Strutton March 24, 2026

UK Guide for SME Founders

Introduction

For many founders, selling a business is the largest financial transaction of their lives. The difference between a well-structured deal and a poorly negotiated one can easily be worth hundreds of thousands — or even millions — of pounds.

Many founders treat heads of terms as a simple formality. In practice, this short document often sets the commercial framework for the entire deal. If the parties agree key principles incorrectly at this stage, they may later struggle to change them without putting the transaction at risk.

This guide explains:

what heads of terms are in a business sale
whether they are legally binding in England and Wales
the key issues founders should consider before signing

Written for business owners rather than lawyers, this guide helps founders understand the risks, recognise common negotiation tactics and know when to seek advice.

What Are Heads of Terms in a Business Sale?

Heads of terms (sometimes called a letter of intent or term sheet) are a preliminary document used in mergers and acquisitions. They summarise the main commercial terms agreed between the buyer and seller before the detailed legal contract is prepared.

In a business sale governed by English law, heads of terms usually sit between early negotiations and the drafting of the final transaction documents.

The document provides a framework for the lawyers who later prepare the:

Typical heads of terms record:

the headline purchase price
whether the deal is structured as a share or asset sale
the proposed payment structure
any earn-out or deferred consideration
the exclusivity period
the due diligence process
the expected timetable for completion

Once heads of terms are agreed, the buyer normally begins legal, financial and commercial due diligence while lawyers start preparing the detailed sale agreement.

Are Heads of Terms Legally Binding in England and Wales?

In most English law transactions, heads of terms are expressed to be “subject to contract.”

This wording means the parties do not intend the document itself to create a binding agreement for the sale of the business. The legally binding contract usually arises later when the SPA or APA is signed.

However, certain provisions within the document are often intended to be binding. These commonly include:

confidentiality obligations
exclusivity arrangements
cost provisions
governing law clauses

For example, if a seller agrees to an eight-week exclusivity period and then negotiates with another buyer during that period, the first buyer may claim the seller has breached a binding lock-out agreement.

A Key Legal Risk

Founders should also understand that “subject to contract” does not guarantee that a transaction remains non-binding in every situation.

In RTS Flexible Systems Ltd v Molkerei Alois Müller GmbH & Co KG [2010] UKSC 14, the Supreme Court held that a binding contract had been created through the parties’ conduct, even though “subject to contract” wording was used.

English courts have repeatedly emphasised that whether a contract exists depends on the objective intentions of the parties, assessed from their words and conduct.

If both parties behave as though they have already agreed the deal, a court may conclude that they have formed a binding contract.

For this reason, founders should avoid acting as though the transaction has completed until the parties sign the SPA or APA.

Why Heads of Terms Matter More Than Many Founders Realise

Although heads of terms are usually short, they play a critical role in shaping the rest of the transaction.

Buyers often try to establish key commercial assumptions at this stage. Those assumptions frequently appear later in the first draft of the SPA. Once lawyers start negotiating the full agreement, it becomes significantly harder to reopen core deal economics without causing delay or damaging the relationship between the parties.

Many disputes in SME acquisitions originate from issues introduced at the heads of terms stage. Examples include:

vague earn-out metrics
poorly defined price adjustment mechanisms
long exclusivity periods that leave the seller locked into slow negotiations

In many SME transactions, the commercial framework set out in the heads of terms shapes the entire negotiation that follows.

If these principles are poorly defined, buyers may later attempt to renegotiate price or deal structure once due diligence begins.

For founders, investing time in negotiating balanced heads of terms can therefore make a significant difference to the final outcome of the transaction.

The Typical Business Sale Process in England and Wales

Most SME business sales follow a broadly similar sequence:

Initial discussions between buyer and seller, often supported by corporate finance advisers or brokers.
Agreement of headline commercial terms, which are recorded in heads of terms.
Buyer due diligence, where the buyer reviews the business’s financial and operational position.
Drafting and negotiation of the SPA or APA by the parties’ lawyers.
Signing and completion of the final transaction documents.

Heads of terms therefore form the commercial blueprint for the stages that follow.

Key Clauses Founders Should Negotiate Carefully

Purchase Price and Deal Structure

Heads of terms should clearly state:

whether the parties will structure the deal as a share sale or an asset sale
the headline purchase price
the mechanism used to calculate the final price

Two pricing approaches are commonly used in UK private M&A.

1. Completion accounts

Under this structure, the parties adjust the price after completion to reflect the business’s actual financial position at the completion date.

2. Locked-box pricing

Under this structure, the parties fix the price by reference to historical accounts from an agreed date. The agreement then includes protections to prevent value from leaving the business before completion.

Agreeing the pricing structure early reduces the risk of disagreements later and makes it harder for the buyer to reopen negotiations during the final stages of the deal.

Payment Terms, Earn-outs and Deferred Consideration

Many SME acquisitions involve payment structures where part of the purchase price is paid after completion.

For example:

part of the price may depend on future performance through an earn-out
payments may be spread over several years
part of the consideration may be in shares or loan notes rather than cash

While the detailed drafting will appear in the SPA, the heads of terms should set out the main commercial principles, including:

how much will be paid on completion
the duration of any deferred payments
the broad method for calculating earn-out payments

Vague or buyer-controlled earn-out structures are a common source of disputes. Clear drafting at the heads of terms stage can significantly reduce that risk.

Exclusivity Periods

Most buyers will ask the seller to agree to an exclusivity period, sometimes called a lock-out or no-shop clause.

This prevents the seller from negotiating with competing buyers while the preferred buyer spends time and money on due diligence.

In SME transactions, exclusivity periods typically last four to eight weeks, although longer periods may appear in more complex deals.

Legal Enforceability

Under English law, a lock-out agreement must usually require the parties to:

provide consideration, and
agree a clear duration.

The Court of Appeal confirmed this principle in Pitt v PHH Asset Management Ltd [1994] 1 WLR 327, holding that a lock-out agreement was binding because the parties supported it with consideration and agreed a defined duration.

However, determining whether consideration exists within a non-binding heads of terms document can be legally complex. Specialist advice is therefore often important when drafting exclusivity provisions.

Founders should also be cautious about:

very long exclusivity periods
automatic extensions
provisions that prevent meaningful pressure on the buyer to progress the deal

Due Diligence

Heads of terms often include a short section outlining the buyer’s due diligence process.

This may describe:

the scope of the review
how the parties will share information
the expected timetable

For founders, the main objective is to prevent open-ended investigations that consume management time and delay the transaction.

A structured timetable and clear expectations around information requests can help maintain momentum in the deal process.

Warranties and Liability

The parties usually negotiate detailed warranties and indemnities in the SPA rather than in the heads of terms.

However, the document may still record the general approach to seller liability. For example:

whether the seller will give warranties in the normal course
whether there will be a cap on liability
whether the parties expect to use warranty and indemnity (W&I) insurance

W&I insurance is typically economical only in transactions with enterprise values above approximately £5–10 million, due to minimum premium thresholds.

The parties usually address more technical issues — such as baskets, de minimis thresholds and claim time limits — later during SPA negotiations.

Founder Involvement After the Sale

In many SME acquisitions, the buyer expects the founder or senior management team to remain involved in the business for a transition period.

Heads of terms may record the broad expectations for this arrangement, including:

whether the founder will remain as an employee, director or consultant
the approximate duration of the transition period

Addressing these issues early helps avoid tension later in negotiations and allows both parties to align expectations around leadership and continuity.

Common Mistakes Founders Make with Heads of Terms

Common pitfalls include:

thinking they can easily renegotiate heads of terms later
agreeing to long exclusivity periods without meaningful deadlines
underestimating the impact of price adjustment mechanisms or earn-out structures

In practice, once the parties sign heads of terms, they often find it difficult to change fundamental deal terms without jeopardising the transaction.

Taking time to understand these issues before signing can help protect the value built in the business over many years.

Advice for Founders Considering a Business Sale

Negotiating heads of terms is one of the most important stages in any business sale. The commercial principles agreed here often shape the outcome of the entire transaction.

For founders who may be selling a business for the first time, early legal advice can help ensure the document accurately reflects the company’s real value and avoids structural issues that later become difficult to correct.

How Jonathan Lea Network Can Help

The Jonathan Lea Network advises founders, shareholders and growing businesses across England and Wales on business sales and acquisitions.

We regularly support SME owners through the entire transaction process, from negotiating heads of terms and managing due diligence to drafting and negotiating share and asset purchase agreements.

Early advice at the heads of terms stage can help protect deal value, avoid common negotiation traps and ensure the transaction progresses efficiently.

If you are considering selling your business or reviewing draft heads of terms from a buyer, our advisers can provide a practical discussion of the issues involved and help you approach negotiations with confidence.

Contact Us For Advice

We usually offer a no-cost, no-obligation 20-minute introductory call as a starting point or, in some cases, if you would just like some initial advice and guidance, we will instead offer a one-hour fixed fee appointment (charged from £250 plus VAT, depending on the complexity of the issues and seniority of the fee earner).

Please email wewillhelp@jonathanlea.net providing us with any relevant information or call us on 01444 708640. After this call, we can then email you a scope of work, fee estimate (or fixed fee quote if possible), and confirmation of any other points or information mentioned on the call.

Frequently Asked Questions on Heads of Terms in Business Sales (England and Wales)

1) Are heads of terms legally binding in England and Wales?

Usually, no. Most heads of terms in a business sale state that they are “subject to contract.” This means the document itself does not create a legally binding agreement to sell the business. The binding contract normally arises later when the parties sign the Share Purchase Agreement (SPA) or Asset Purchase Agreement (APA).
However, the parties often intend some provisions within heads of terms to be binding. These typically include confidentiality clauses, exclusivity (lock-out) provisions and costs clauses. English courts will generally enforce these clauses if the parties clearly intend them to be legally binding.
Founders should also be aware that the conduct of the parties during negotiations can sometimes create binding obligations. In certain situations, a court may conclude that the parties formed a contract through their actions, even where the document includes “subject to contract” wording.

2) Who prepares heads of terms?

The buyer or the buyer’s advisers often prepare the heads of terms, although in some transactions the seller or the seller’s corporate finance adviser produces the first draft.

3) Can the purchase price change after heads of terms have been agreed?

Yes. Because heads of terms are usually non-binding, buyers may renegotiate the price if due diligence reveals issues or if trading performance changes before completion.

4) What is the difference between heads of terms and a share purchase agreement?

Heads of terms summarise the key commercial principles of the deal in relatively simple language. The SPA is the detailed, legally binding contract that transfers ownership and sets out warranties, indemnities, conditions and completion mechanics.

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This article is intended for general information only, applies to the law at the time of publication, is not specific to the facts of your case and is not intended to be a replacement for legal advice. It is recommended that specific professional advice is sought before relying on any of the information given. © Jonathan Lea Limited.