Deal process
Heads of Terms in a UK Business Acquisition
Heads of terms set out the main deal points before lawyers draft the contract. What they cover, which parts are binding, and how to avoid renegotiating later.
Short answer
Heads of terms set out the main deal points before lawyers draft the contract. What they cover, which parts are binding, and how to avoid renegotiating later.
Key takeaways
- Heads of terms (also called a term sheet or letter of intent) record the main commercial points of a deal before the sale and purchase agreement is drafted.
- Most of the document is not legally binding, but a few clauses usually are: exclusivity, confidentiality, costs and governing law.
- They should state the price and, just as importantly, how it is paid — cash at completion, deferred consideration, loan notes, earn-out — and the pricing mechanism.
- Conditions the buyer needs before completing, such as funding, diligence or key contracts, belong in the heads so they do not surprise the seller later.
- Vague heads of terms do not save time; they move the negotiation into the contract, where it is slower and more expensive.
What heads of terms are
Heads of terms are a short document, often two to six pages, that records what the buyer and seller have agreed in principle. They come after an offer has been accepted and before due diligence and the drafting of the sale and purchase agreement (SPA). In the UK the terms "heads of terms", "heads of agreement" and "term sheet" are used almost interchangeably; in US-style processes the same role is often played by a letter of intent.
Their purpose is practical: to make sure both sides genuinely agree on the big points before either spends serious money on lawyers, accountants and diligence. A disagreement found in heads of terms costs an afternoon. The same disagreement found halfway through drafting the SPA costs weeks.
Which parts are binding
| Clause | Usually binding? | Why |
|---|---|---|
| Price and structure | No | Subject to diligence and contract |
| Conditions to completion | No | Recorded intent, finalised in the SPA |
| Exclusivity (lock-out) | Yes | Stops the seller negotiating with others for a set period |
| Confidentiality | Yes | Often refers to an NDA already signed |
| Costs | Yes | Each side normally bears its own |
| Governing law and jurisdiction | Yes | Says which law applies to the binding parts |
The document should say clearly which clauses are binding. If it does not, there is a risk the whole thing is argued to be a contract, or that the clauses meant to bind — exclusivity especially — do not.
What to include
- The parties and what is being bought. Shares or assets, which company or companies, and anything excluded.
- The price and how it is paid. Cash at completion, deferred consideration, a vendor loan note, an earn-out or rolled equity — each named and sized separately.
- The pricing mechanism. Locked box or completion accounts, and how cash, debt and working capital are treated.
- Conditions. Funding, satisfactory diligence, key customer or landlord consents, regulatory approvals.
- The seller's role after completion. Handover period, consultancy, and any restrictive covenants.
- Warranties and indemnities. At least the expected approach, including whether warranty and indemnity insurance is planned.
- Timetable and exclusivity. How long exclusivity lasts and a target date for completion.
Heads of terms vs a letter of intent
Functionally they are the same step. A letter of intent is often written as a letter from the buyer to the seller and may come earlier in a process, while heads of terms tend to be a jointly agreed document. What matters is not the title but whether the document is specific enough on price, structure and conditions to prevent the contract becoming a second negotiation.
Common mistakes
- A headline price with no structure. "£3m" means very different things if £1m of it is an earn-out.
- Leaving the pricing mechanism open. Choosing between locked box and completion accounts later reopens the price.
- Exclusivity that is too short. If diligence cannot realistically finish in the period, the buyer loses protection at the worst moment.
- Hiding conditions. A funding or consent condition raised after heads are signed reads to the seller as a renegotiation.
When to agree heads of terms
Heads of terms usually follow an accepted offer and come before full due diligence. At that point the buyer has seen enough to put a price on the business — normally the information memorandum, some financial history and at least one meeting with the owner — but has not yet spent heavily on advisers. Signing heads is what justifies that spend, which is why exclusivity is the clause buyers care most about at this stage.
Moving to heads too early, before the buyer understands the earnings or the funding, tends to produce a document full of caveats that protects nobody. Moving too late leaves the seller exposed to other bidders while the buyer works without exclusivity. A practical test is whether the buyer could explain, in a paragraph, how the price was reached and how it will be funded. If they can, heads of terms are usually the right next step.
Writing the price and structure clearly
The price section does most of the work in heads of terms, and most later disputes trace back to it. A clear version states the headline enterprise value, whether that is on a cash-free, debt-free basis, the expected level of working capital, and then each element of consideration with its amount and timing. If part of the price is a loan note, it should say whether it carries interest and roughly how it is repaid. If part is an earn-out, it should name the metric and the measurement period, even if the detail is left for the contract.
It also helps to say what the price assumes. A buyer who has priced the business on the latest filed accounts, or on management figures still to be verified, can say so, which makes any later adjustment after diligence a consequence of the stated basis rather than a surprise. Sellers generally prefer that honesty to a higher number that is withdrawn later.
What happens after heads are signed
Once heads of terms are signed, the buyer starts confirmatory due diligence — financial, legal, tax and commercial — and the buyer's lawyers usually prepare the first draft of the sale and purchase agreement. The disclosure process follows, in which the seller sets out exceptions to the warranties. Funding is finalised in parallel, and any conditions in the heads are worked through.
If diligence turns up something material, the heads of terms are the reference point for what was agreed and why. A buyer who stated the basis of the price in the heads can point to what has changed. A buyer who did not will find any revision harder to justify, and the seller will be less willing to accept it. That is the real value of a clear, specific set of heads: not that it binds anyone on price, but that it keeps the rest of the process honest.
Throughout, the binding clauses keep working: the seller stays out of talks with other buyers while exclusivity runs, both sides keep the deal confidential, and each pays its own costs if it falls away. If exclusivity is close to expiring and the deal is still progressing, the parties normally agree a short written extension rather than letting it lapse quietly.
How TrueValue helps
TrueValue generates heads of terms from the deal record, so the parties, the price and the structure you modelled in deal economics carry into the document rather than being retyped. The document can then be sent for e-signature with the signing parties read from the document itself, and the signed copy is filed against the deal.
Frequently asked questions
Are heads of terms legally binding in the UK?
- Mostly not. The commercial terms such as price are usually non-binding, but clauses on exclusivity, confidentiality, costs and governing law are normally made binding. The document should say which is which.
What is the difference between heads of terms and an SPA?
- Heads of terms are a short summary of the agreed deal points, mostly non-binding. The sale and purchase agreement is the full, binding contract that transfers the business, with warranties, indemnities and detailed mechanics.
How long should exclusivity last in heads of terms?
- Long enough for the buyer to complete diligence and arrange funding realistically. The right period depends on the size and complexity of the deal, and the parties often agree it can be extended.
Should heads of terms include the payment structure?
- Yes. The headline price means little without knowing how much is paid at completion and how much is deferred, contingent or lent back, so each element should be named and sized.
Is a letter of intent the same as heads of terms?
- They serve the same purpose of recording agreed deal points before the contract. A letter of intent is often a letter from the buyer, while heads of terms are usually a jointly agreed document.
Can TrueValue create heads of terms?
- Yes. TrueValue drafts heads of terms from the deal record, carries over the structure you modelled, and lets you send the document for e-signature with the signed copy filed on the deal.
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Related guides
- LOI vs IOI: What Is the Difference?
An IOI says you are interested and roughly at what price; an LOI says on what terms you intend to buy. Which parts bind, and how each is used.
- What Is a Vendor Loan Note in a UK Business Acquisition?
A vendor loan note lets the seller take part of the price later, as a loan to the buyer. It closes funding gaps in SME deals, but only works if both sides agree how it ranks, when it is repaid and what happens if cash runs short.
- What Is an Earn-Out in a Business Acquisition?
An earn-out pays the seller more if the business hits agreed targets after completion, and less — or nothing — if it does not. It bridges a price gap, but it also creates a relationship that runs past the day the deal closes.
- Locked Box vs Completion Accounts: How UK Buyers Fix the Final Price
The two ways to turn a headline offer into the price that actually changes hands, where each goes wrong, and how buyers choose between them.
- Asset Purchase vs Share Purchase: Which Structure to Use
A share purchase buys the company, warts and all. An asset purchase buys chosen pieces of it. The two are not a formality — they change what you are liable for, what needs consent, and what due diligence has to prove.