Whether you are considering selling or buying a business in the UK, it is important to be prepared and understand the process ahead of you. Whilst for both parties the focus will undoubtedly be on the sale itself, it’s worth remembering that this multi-faceted process involves a variety of legal documentation.
Two documents that play pivotal roles in the process are Heads of Terms and Sale & Purchase Agreements. In this article we take a look at their purpose and the key differences between them.
Heads of Terms (HoT)
HoT documents outline the key commercial terms of the proposed sale. They are not legally binding but serve as a basis for further negotiation and agreement between the parties.
Key features include:
- Key terms – summarises essential terms of the transaction including purchase price, payment structure, conditions, proposed completion date and any significant commercial terms
- Non-binding – HoTs provide a framework for a transaction but are not legally binding agreements
- Flexibility – HoTs allow for flexibility in the negotiation process, enabling parties to refine and finalise terms before formalising the agreement in the form of the SPA, providing the opportunity for parties to identify and address any potential issues early on
- Confidentiality – HoTs may include confidentiality provisions to protect sensitive information exchanged during negotiations
- Exclusivity period – sometimes negotiated at this stage, HoT may provide a short period of exclusivity for the buyer to complete the transaction
Sale & Purchase Agreement (SPA)
A SPA is a comprehensive legal document that formalises the terms and conditions of the sale between buyer and seller. This is the final contract that governs the transaction and outlines the rights and obligations of both parties. SPAs are legally binding and provide a detailed framework for completing the sale of the business.
Key features include:
- Detailed terms – including the purchase price, payment structure, warranties, representations, indemnities, and any conditions precedent to the completion of the sale
- Legally binding – once signed by both parties, SPAs become legally binding contracts that enforce the agreed-upon terms and conditions. This provides a level of certainty and security for both buyers and sellers.
- Execution – typically executed after completion of due diligence and negotiation of terms, SPAs are prepared and reviewed by legal professionals.
- Finality – representing the final stage of the negotiation, the SPA is the official record of the agreement reached between parties.
In summary, Sale & Purchase Agreements and Heads of Terms are both integral components of the business sale process in the UK. Both have distinct characteristics and serve different purposes: HoTs are preliminary agreements that outline key commercial terms and provide a basis for further negotiation, whilst SPAs are comprehensive, legally binding documents that formalise sale terms.
If you have questions about your business sale or acquisition and the process involved, please feel free to contact a member of our team.
