In Short
- A heads of agreement sets out the main terms of a business sale and helps guide negotiations before a formal contract.
- While generally non-binding, specific clauses such as confidentiality and exclusivity can be legally enforceable.
- It provides clarity, timelines, and structure, helping to manage expectations and support smooth due diligence.
Tips for Businesses
Use a heads of agreement to summarise key terms of a business sale, including price, assets, employees, and timelines. Clearly mark which clauses are binding, such as confidentiality or exclusivity. Keep the document concise to avoid unintended obligations, while providing enough detail to guide negotiations and streamline the due diligence process.
Table of Contents
When you are selling a business, it is a good idea to document the key terms of the business. Being able to document those essential terms will streamline the process of the proposed transaction and help all parties stay informed. A ‘heads of agreement’ is one way to set out those essential terms before reaching a final agreement. This article outlines what a heads of agreement looks like and offers guidance on when to use one when selling a business.
What is a Heads of Agreement?
A heads of agreement is a document that sets out the main terms of a business sale. It is an agreement between the purchaser and the seller. A heads of agreement is generally a non-binding document that serves as a statement of intent to agree on a future, formal contract. However, they can become legally binding if they meet the requirements for a binding contract, specifically if the document is in writing, signed by all parties, contains a clear offer and acceptance, offers consideration, and demonstrates an intention to create legal relations. As such, while parties typically intend heads of agreement to be non-binding, they use them to set out their intentions.
A heads of agreement can also sometimes be known as:
- a letter of intent;
- letter of potential interest;
- memoranda of understanding;
- term sheet; or
- a heads of terms.
While parties generally intend heads of agreement documents to be non-binding, they traditionally use them to show serious intent. Importantly, parties often include specific clauses within heads of agreement that are binding, such as confidentiality and exclusivity provisions, to protect themselves during negotiations. Additionally, courts may enforce a heads of agreement if it inadvertently meets all the legal requirements for a binding contract, even if the parties did not intend it to be binding.
When is a Heads of Agreement Used?
The heads of agreement typically emerge at the early stage of a contract negotiation and often follow the negotiation process. You will often find heads of agreement in various commercial transactions, such as joint venture agreements, mergers and acquisitions and business sales.
Continue reading this article below the formWhat Will a Heads of Agreement Include?
The heads of agreement typically include several key points. First, it will contain confirmation of the main terms agreed in principle. This can include the purchase price, the assets being acquired, the payment terms, and any other essential terms of the agreement.
Second, it will also contain a timetable of the parties’ obligations during the negotiation. This might include instances where each party must respond to an offer on the purchase price or deliver specific key documents.
Finally, it may also include certain legally binding clauses that are expressly stated. One example may be an exclusivity agreement or confidentiality provisions. If a heads of agreement includes expressly legally binding terms, then those terms will be binding, even though the overall heads of agreement document may be intended as non-binding..
Will I Have to Use a Heads of Agreement Document?
A heads of agreement document is a useful way to communicate the basic terms of the agreement you are entering into. It is not legally necessary, but it can be a useful way to keep track of your obligations and ensure that all parties have a shared understanding of the proposed transaction.
What Should My Heads of Agreement Document Include?
If you do decide to enter into a heads of agreement, you should consider including the following headline points:
- the parties to the agreement;
- the type of transaction;
- the purchase price, if you have agreed on it;
- a list of assets being transferred and assets held;
- a list of employees and what will happen to those employees;
- a timeline, including obligations and when you expect the due diligence process to start;
- conditions precedent that must be satisfied before you formally complete the transaction;
- any restrictive covenants;
- any exclusivity arrangements during the negotiation period; and
- confidentiality obligations to protect sensitive business information.
Benefits and Risks of Heads of Agreement
While heads of agreement offer several advantages in business sales, including providing clarity and structure to negotiations, they also carry certain risks that parties should be aware of.
Benefits include:
- creating a clear framework for negotiations;
- establishing timelines and milestones;
- demonstrating serious intent to proceed; and
- facilitating smoother due diligence processes.
Risks include:
- potential inadvertent creation of binding obligations;
- disputes over the interpretation of terms;
- false sense of security in non-binding arrangements; and
- possible delays if terms require frequent renegotiation.
Selling your business involves a number of moving parts. This fact sheet will provide an overview of the sale of business process and
the documents you need to make an effective sale.
Key Takeaways
Heads of agreement are valuable documents that set out the key terms of a business sale transaction. While generally intended to be non-binding statements of intent, they can become legally enforceable if they meet the requirements for a binding contract. They can be used at various stages during a transaction, but typically occur after initial negotiations and before the commencement of formal due diligence and completion procedures.
Certain specific clauses within heads of agreement, such as confidentiality and exclusivity provisions, are commonly made expressly binding to protect parties during negotiations. A heads of agreement can help ensure that both parties are on the same page. Furthermore, the timeline established by a heads of agreement is very useful for the swift and effective execution of the agreement.
If you need help with heads of agreement when selling your business, our experienced business sale lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
Both parties can mutually agree to a new heads of agreement.
As heads of agreement are non-binding, missing certain points is not a problem so long as you can communicate them to the other party eventually.
No, heads of agreement can become legally binding if they meet all the requirements for a valid contract, even if the parties intended them to be non-binding. Additionally, specific clauses such as confidentiality and exclusivity are often expressly made binding within the document.
The level of detail should strike a balance between providing sufficient clarity for negotiations and avoiding the inadvertent creation of binding obligations. Key commercial terms should be included, but overly detailed provisions may be better left to the formal sale agreement.
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