Do I Need a Heads of Agreement When Selling a Business?

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 smoothen the process of the proposed transaction and help all parties stay in the loop. A ‘heads of agreement’ is one way to set out those essential terms before reaching a final agreement. This article will outline what a heads of agreement looks like, and offer some 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, and importantly, it is not a legally binding agreement. As a non-binding document, the purpose of the heads of agreement is to set out the intentions of both parties. 

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.

Although a heads of agreement is a non-binding document, it is traditionally used to prove serious intent. However, suppose there are terms within the heads of agreement protected by a confidentiality agreement. In that case, you will still be bound by the confidentiality agreement, even though the heads of agreement will not be binding.

When is a Heads of Agreement Used?

The heads of agreement will usually come at the early stage of a contract agreement, and will 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 more.

What will a Heads of Agreement Include?

The heads of agreement will usually include several points. First, it will contain confirmation of the main terms agreed in principle. This can include the purchase price, the assets to be acquired, the terms of the payment, and any other terms which are essential to the agreement.

Second, it will also contain a timetable of the parties’ obligations during the negotiation. This might include when each party must respond to an offer on the purchase price or deliver certain key documents. 

Finally, it may also include certain legally binding clauses. One example may be an exclusivity agreement. If a heads of agreement includes legally binding terms, then those terms will be binding. This applies even though the heads of agreement document itself is 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 necessary, but can be a useful way of keeping track of your obligations.

You can also use multiple heads of agreement if the negotiation is lengthy or if you renegotiate certain terms. The heads of agreement usually comes before the due diligence process, which is often the more costly part of the transaction. 

Will Should My Heads of Agreement Document Include?

If you do decide to enter into a heads of agreement, you should include the following 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 that must be satisfied before you formally complete the transaction.

If you are unsure whether a heads of agreement contains a legally binding clause, you should seek professional legal advice. 

Key Takeaways

A heads of agreement is a document that sets out key terms of an agreement. It can come at any stage during a transaction. However, it usually occurs after a negotiation process and before further steps to formally complete the transaction. They are non-binding agreements, though certain terms of a heads of agreement can be legally binding. A heads of agreement can help ensure that both parties are on the same page. Further, the timeline that a heads of agreement will help establish is very useful for a 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.

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