Deciding to sell your business is of course, a major consideration. The process itself involves careful planning and preparation and it’s important to understand what to expect along the way. Part of that understanding is being clear about the jargon and the various terms that will be used throughout the process by the parties involved.
One important aspect of the sale process we are often asked to explain is ‘Heads of Terms’ – also known as Heads of Agreement, Letters of Intent, Memorandum of Understanding or Memorandum of Sale.
So, what are Heads of Terms?
Commonly used in the earlier stages of a sale, these documents represent an initial agreement between buyer and seller regarding the fundamental terms of the proposed sale. At this stage these terms are not legally binding but set out a framework for an eventual sale contract.
Heads of Terms typically include essential details such as:
- Parties involved
- Purchase price (where agreed)
- Payment structure e.g. details of deposit required, staged payments, deferred consideration etc
- Conditions attached – any conditions to be met before the sale can proceed e.g. regulatory approvals, due diligence process, or finance being secured
- Confidentiality provisions – legally binding clauses are often included to protect sensitive information about the business being sold. This ensures confidentiality is maintained throughout the negotiation process.
- Proposed completion date – the anticipated date is usually included, providing both parties with a timeline, enabling them to plan ahead
- Exclusivity period – sometimes negotiated at this stage, Heads of Terms can provide a short period of exclusivity for the buyer to complete the transaction
What are the benefits of Heads of Terms?
- Clarity – by establishing key terms upfront, the document provides clarity and understanding for both parties, helping to minimise potential misunderstandings as the process progresses.
- Efficiency – creating Heads of Terms allows all parties to identify any possible issues early on and address them before proceeding, streamlining negotiations and reducing the likelihood of delays.
- Commitment – although not legally binding, Heads of Terms demonstrate a commitment from both buyer and seller to proceed, helping to build trust and confidence.
In summary, Heads of Terms play an important role in a business sale, providing a useful framework for negotiation and agreement between buyer and seller. It’s essential to remember these documents are not legally binding, they outline the proposed terms of the sale but do not create contractual obligations.
However, it is advisable for both parties to seek legal advice before finalising Heads of Terms to ensure their interests are adequately protected.
If you would like to find out more about the process of selling your business, or would like to understand the potential value of your business, please contact a member of our team for a confidential chat.
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