What are heads of terms?
Heads of terms in a sale of company shares or business assets generally take the form of a relatively short document outlining the main terms of the deal that have been agreed in principle.
What should I expect to see in a set of heads of terms?
Although it sounds trite it is true to say that each sale is different and the contents of heads of terms will vary, however, you can expect heads of terms to include:
- Shares/assets you will sell. Where shares are being sold the proportion of shares in the company that equates to. Where land forms part of the assets being sold the title numbers and plans to the property
- The purchase price for the shares/assets and when you will receive it. Is it cash on completion; deferred payment terms; loan notes; earnout or a combination of all
- Whether you and the buyer are to keep negotiations confidential
- Any period of exclusivity you are willing to offer to the buyer and whether the buyer is to pay you for it
- The timeframes to complete the deal and if there are any conditions you have to satisfy before the buyer will enter into the main contract to purchase the shares (the share purchase agreement or SPA) or assets (the asset purchase agreement or APA).
What is the purpose of heads of terms?
Rather than a tool of negotiation, you should see the heads of terms as way of avoiding any misunderstanding of key terms agreed with the buyer and to provide a useful account of the steps that need to be taken and obligations to be observed before the SPA/APA is signed.
Do I need heads of terms?
A handy initial understanding, but you might ask “do I really need to pay my lawyer to draft and negotiate a set of head of terms when it sounds like the SPA/APA is where my focus should be?”
You don’t have to have heads of terms and many share or asset sales complete without a set, however, there are reasons why heads of terms are important legal documents.
What are the benefits of heads of terms?
Although signed heads of terms do not guarantee you will sell your shares or assets to that particular buyer, they demonstrate commitment from both sides to make progress towards a deal in good faith and that commitment will hopefully dissuade “tyre-kickers” from wasting your time.
It can be psychologically harder for a buyer to go back on earlier commitments if they are recorded in heads of terms and you can proceed with more confidence.
You can introduce binding commitments to the buyer at an early stage such as confidentiality (avoiding the issue of the company’s competition becoming aware of your plans to sell), exclusivity (so the buyer is assured you are committed to them for a period of time) and a payment of your costs (if negotiations breakdown or the buyer breaches the terms of the heads of terms).
Finally, if the deal is complex, heads of terms ensure the buyer agrees to the key terms of the deal with you which might prevent wasted time and money if the main issues cannot be overcome.
Need more help?
There are other reasons why it is beneficial to have a set of heads of terms in place and the document is not just for the realms of multi-million pound deals and as each sale is unique this article is not to be interpreted as advice. If you would like any help and advice on your proposed sale and heads of terms please contact our specialist corporate team on 0151 305 9650 or email email@example.com.