When selling a business, there are many technical phrases and much jargon used when conversing with potential buyers and intermediaries. ‘Heads of terms’ is a term commonly used throughout the initial business sale process and when entering the first stage of discussions with a serious buyer.
Heads of terms are often used in commercial transactions, such as a business sale, share sale or asset sale, and agreements of a similar nature. A heads of terms agreement details preliminary contract terms that are yet to be finalised as discussions are underway concerning the sale of the business.
Heads of terms can help lay the groundwork for the sale of your business as your appointed business broker negotiates a competitive and mutually beneficial agreement with the buyer. The heads of terms agreement formalise the intent of both parties involved in the sale and any associated terms.
Heads of terms for selling or buying a business
During the business sale process, you may receive interest from a variety of parties looking to buy a business, and therefore invite them to submit serious offers to encourage financial commitment. Once an offer has been submitted and the bones of the deal have been discussed, heads of terms will typically be issued to formally record the premise of the ongoing agreement.
We discuss how to prepare heads of terms, who produces heads of terms and what happens after heads of terms, also known as a letter of intent, have been issued.
What should heads of terms include for a business sale?
To write heads of terms, you need to understand the contents of the document that will formalise provisional terms and register the intent of parties engaged in the transaction. Heads of terms often include:
- Date of document
- Date of intended completion
- Details of parties involved
- Sale price (if agreed)
- Pre-conditions
- Agreement terms
As both parties engage in discussions until they are ready to sign a detailed contract, heads of terms will be issued to confirm initial agreement terms. For example, an exclusivity agreement or non-disclosure clause may be requested pre-sale or an earn-out agreement post-sale.
As the document is not legally binding unless stated otherwise, it will not require a signature from both parties, however, this may be provided to show that the document has been acknowledged.
Who produces heads of terms?
To answer who draws up heads of terms, either party can prepare the document, however, this is often drafted by the buyer, typically the seller’s agent, to confirm pre-conditions and agreement terms.
Can heads of terms be legally binding?
Heads of terms are not legally-binding and the buyer is not obliged to continue; however, the agreement will detail the intention of both parties and their expectations from the sale. Additional agreements attached to heads of terms may be legally binding, such as a confidentiality agreement.
What comes after heads of terms when selling a business?
After heads of terms have been issued, discussions will continue between both parties to confirm the finer details of the contract. While negotiations continue, your appointed business broker will advise you on how to structure the deal and manage due diligence checks to check for any red flags, such as undisclosed liabilities.
At Selling My Business, our team of leading business brokers can support you throughout the business sale journey, from preparing your business for sale, drafting heads of terms. And arranging due diligence checks. We offer a free consultation to business owners looking to sell a business and a free company valuation to calculate business worth.
