Heads of terms: what they cover and what happens next.

What are heads of terms in a business sale?

Heads of terms — also called a term sheet, letter of intent or heads of agreement — set out the principal commercial terms agreed between buyer and seller before legal documentation is drafted. They record price, structure, timetable, conditions and the parties' expectations of each other. Most of the document is expressly stated not to be legally binding; a small number of provisions usually are, typically exclusivity, confidentiality, costs and governing law. The distinction matters legally and matters much less in practice: reopening a point conceded in heads of terms, without a new fact to justify it, costs credibility and frequently costs the transaction.

The reason heads of terms carry that weight is sequencing. Everything expensive happens afterwards. Once they are signed the buyer commissions accountants and solicitors, diligence begins, the sale agreement is drafted, and both sides accumulate cost and momentum. Terms that are vague at this point are settled later under time pressure, in exclusivity, when the seller no longer has competing bidders. Terms that are precise at this point are simply implemented.

What do heads of terms include?

A serviceable set of heads covers what is being bought, what is being paid, when, on what conditions, and what each party is committing to in the meantime.

Price and consideration structure

The headline price is the least informative number in the document. What matters is the composition: how much is payable in cash at completion, how much is deferred on fixed dates, how much is contingent on performance, whether any part is paid in shares or loan notes, and what is held in retention or escrow and for how long. Two offers at the same total can differ by a wide margin in what the seller actually receives, and by more than that in the risk attached to receiving it. Where any element is contingent, the measurement basis belongs here rather than in later drafting — see earn-outs and deferred consideration.

The pricing mechanism

Heads should state whether the price is offered on a cash-free, debt-free basis, how cash and debt are defined, what happens to working capital and how the target will be set, whether the deal uses completion accounts or a locked-box mechanism, and the date from which economic risk and benefit pass to the buyer. These provisions determine the difference between the agreed price and the amount received. They are explained in cash-free, debt-free and working capital adjustments, and the terminology sits alongside enterprise value and equity value.

Share sale or asset sale

In a share sale the buyer acquires the company itself, with its history, contracts and liabilities. In an asset sale the buyer takes selected assets and leaves the company, and usually most historic liabilities, with the seller. Sellers of UK trading companies generally prefer a share sale: it is a clean break, contracts usually continue without assignment, and a share disposal is the route on which Business Asset Disposal Relief may be claimed where the qualifying conditions are met. Buyers often prefer assets for the mirror-image reasons. The tax consequences differ substantially for both sides and should be modelled with your accountant before the structure is agreed, not after.

Conditions, timetable and process

Set out what must happen before completion — diligence to the buyer's satisfaction, funding confirmed, third-party or landlord consents, regulatory approvals, key contracts renewed — and attach dates to each. A timetable with named milestones is the seller's principal defence against drift, because it converts delay from an inconvenience into a breach of an agreed schedule.

The seller's position after completion

Handover length, whether it is employment or consultancy, days per week, what it pays, board or decision rights during any earn-out, and the outline scope, duration and geography of restrictive covenants. These are commonly left to the lawyers and should not be. Non-compete terms constrain what an owner may do for years afterwards, and they are far easier to shape now than during final drafting.

Warranties, indemnities and liability caps

Even in outline, heads should indicate the expected warranty package, the overall liability cap, the time limits for claims and any known indemnities. A seller who agrees a headline price without any indication of the liability regime has agreed to a number, not to a deal.

Are heads of terms legally binding?

Usually only in part. The commercial terms are ordinarily expressed to be subject to contract and not binding, while exclusivity, confidentiality, the allocation of costs, governing law and sometimes a standstill obligation are drafted to bind. The document should state clearly which clauses are which, because ambiguity on that point has produced litigation. This is short and consequential drafting, and it warrants the seller's solicitor rather than an exchange of emails.

What is exclusivity in a business sale?

Exclusivity, sometimes called a lock-out, is a binding undertaking by the seller not to negotiate with, solicit or provide information to any other party for a defined period. Buyers ask for it because they are about to spend money on advisers and want protection against being used to establish a price. That is a reasonable position. It is also, from the seller's side, the single largest transfer of negotiating leverage in the entire process, because competition is the seller's leverage and exclusivity removes it by agreement.

Handled properly, exclusivity is short, specific and earned. Eight to twelve weeks is workable on an owner-managed company where diligence preparation has been done. It should begin only when the buyer's funding position is evidenced and the diligence request list has been issued, and it should end automatically on the stated date without any right of automatic extension. Tying it to milestones — diligence commenced within a week, first draft agreement by a stated date — converts it from a fixed grant of time into a commitment to progress. A buyer requiring six months to decide is describing either their conviction or their funding.

Length is not the only variable. Exclusivity beginning before the buyer has demonstrated funding, extending automatically, or covering activity beyond genuine negotiation with competing buyers all shift risk to the seller. So does a costs undertaking that is one-directional. Where the process has produced several credible parties, the practical protection is to settle as much of the commercial detail as possible before granting exclusivity at all, because the terms not yet agreed when it begins are the terms that will be negotiated without competitive tension.

What happens after heads of terms are signed?

The buyer instructs advisers and issues the diligence request list; the seller opens the data room; the buyer's solicitors prepare the share purchase agreement and disclosure documentation; conditions are worked through; the completion accounts or locked-box mechanics are settled in detail; and exchange and completion follow, often on the same day in an owner-managed transaction. Eight to sixteen weeks from signed heads to completion is a common range where preparation is sound. How long it takes to sell a business sets out the full sequence, and due diligence preparation covers the phase that most often determines whether the timetable holds.

Can a buyer change the price after heads of terms?

They can attempt it, since the price provisions are typically non-binding. Whether the attempt succeeds depends less on the law than on two things: whether a genuine new fact has emerged from diligence, and whether the seller still has an alternative. A finding that changes maintainable earnings will legitimately reprice a deal. A reduction proposed late in exclusivity, on grounds that were visible before it was granted, is a different exercise, and the seller's answer is stronger when the heads were precise, the diligence was prepared, and the exclusivity period is close to expiring rather than freshly extended.

Deal structures a UK seller will encounter

Heads of terms also record which kind of transaction this is, and the alternatives are not interchangeable. A trade sale to a competitor or to a buyer in an adjacent market usually produces the strongest price where genuine synergies exist, and brings the most acute confidentiality problem during the process. A sale to a private equity-backed platform often involves reinvestment by the seller into the acquiring vehicle, so part of the consideration becomes an equity stake whose value depends on a second exit years later — that stake needs the same scrutiny as an earn-out, including the terms on which it can be realised. A management buy-out gives continuity for staff and customers and a counterparty who needs no education about the business, at the cost of funding complexity and typically more deferred consideration. An employee ownership trust is an established UK structure with its own qualifying conditions and tax treatment, suited to owners prioritising continuity over maximum price.

Each route changes what the heads of terms must contain. A private equity structure requires the reinvestment terms, the ratchet and the exit horizon to be set out; an MBO requires the funding package and its conditions; a trade sale requires more attention to how and when employees and customers are told. Agreeing a price before agreeing which of these transactions is taking place is a common way to spend eight weeks discovering that the parties were describing different deals.

Negotiating heads of terms with more than one buyer

The strongest position a seller occupies is the fortnight before exclusivity, when two or more credible parties are still engaged. That is the moment to settle everything that will otherwise be conceded later: the pricing mechanism and its definitions, the split between completion cash and contingent consideration, the length of any handover, the outline of the warranty cap, and the exclusivity period itself. Buyers accept detail readily at this stage because they are competing; the same points reopened in week seven of diligence are negotiated against a seller with no alternative.

Comparing competing heads is a separate discipline from comparing headline prices. The useful comparison is cash at completion, the amount and security of anything deferred, the conditions attached, the buyer's evidenced funding, their record of completing acquisitions, the length of the tie-in required and the exclusivity being asked for. A lower offer with clean funding, a short exclusivity and a ten-week timetable regularly delivers more, and delivers it sooner, than a higher offer that depends on a funding process the seller cannot see. Where the process has been run properly, this is the point at which that work is realised.

Mistakes that recur in heads of terms

Agreeing a headline figure without agreeing the pricing mechanism, so that cash, debt and working capital are argued about after exclusivity has been granted. Granting exclusivity before the buyer's funding is evidenced. Accepting an automatic extension clause. Leaving restrictive covenants to the lawyers and discovering their scope during final drafting. Describing an earn-out as a percentage of 'profit' without defining the term. Failing to state which clauses bind. And treating heads of terms as a formality on the basis that they are not legally binding — a document that is not binding still sets the anchor for every negotiation that follows it.

Where judgement genuinely comes in

There is no objectively correct structure. A higher headline price with a large contingent element and a three-year tie-in may be worth less to a particular seller than a lower all-cash offer completing in ten weeks. That is a judgement about circumstances, tax position and appetite for continued involvement, and it is the conversation worth having before responding to an offer rather than after heads of terms have been signed. The pattern behind most difficult transactions is not a bad price agreed at this stage; it is a term left undefined at this stage and settled later, in exclusivity, by the party with more leverage.

Where to start

Terms are easier to hold when the business has been prepared and there is more than one interested buyer — see selling a business for how a competitive confidential process is run, and preparing a business for sale for the work that comes first. Further reading on offers and structure is collected in the deal structure Insights archive.

This page is general information about the law and tax treatment of business sales in the United Kingdom as at 9 August 2026. It is not personal advice, and the treatment of any particular transaction depends on how the deal is structured, the shareholders' own circumstances, the status of the company, the legislation in force at completion and the interpretation of your own accountant and solicitor. Take advice on your own facts before acting.