When you are considering purchasing a business, Heads of Terms are one of the earliest and most important documents you will encounter. Although usually not legally binding, they set the foundation for the entire transaction. They outline what you, as the buyer, are agreeing to in principle before moving into due diligence, legal drafting, and final negotiations.
This 10-point checklist highlights what buyers should look for, what to clarify, and what to protect when reviewing or preparing Heads of Terms.
1. Confirm the Parties Involved
Ensure the document clearly identifies who you are buying from, including the correct legal entity. This avoids confusion later, especially if the seller operates multiple companies.
2. Agree the Proposed Purchase Price
Include the price agreed so far and the basis on which it was negotiated. If the figure is still subject to due diligence, this should be clearly stated to avoid any assumption of finality.
You can also note any factors that could influence the final price, ensuring both parties understand what has been agreed and what remains provisional.
3. Clarify the Payment Structure
Break down how the payment will be made. Confirm whether deposits, staged payments, deferred consideration, or retention amounts are required. This helps you assess whether the structure aligns with your funding arrangements and risk appetite.
4. Set Out Conditions for Completion
Heads of Terms should list any conditions you need to satisfy before completion, such as securing finance or completing due diligence. Make sure these conditions are clear, realistic, and protect your position as the buyer.
Clearly defining these requirements also helps manage expectations with the seller and provides a framework for resolving any issues that may arise before completion.
5. Include Robust Confidentiality Provisions
While you will receive sensitive information during the process, the seller may also request confidentiality from your side. Ensure obligations are mutual, reasonable, and aligned with how you intend to manage advisers and funders.
6. Agree an Expected Completion Timeline
A proposed completion date helps you plan your funding, due diligence work, and transition arrangements. Ensure the timeline is achievable and allows sufficient time for professional assessments.
7. Negotiate an Exclusivity Period
An exclusivity clause prevents the seller from negotiating with other buyers for a defined period. This helps ensure your due diligence can proceed without the risk of competing offers arising during this time. Exclusivity should be long enough to complete all necessary checks.
8. Clarify Assumptions Behind the Deal
If your offer is based on assumptions about trading performance, staffing, contracts, or assets, ensure these assumptions are explicitly recorded. This protects you if material issues emerge later.
9. Establish the Intent and Commitment of Both Parties
Heads of Terms indicate that both sides intend to move forward. Assess whether the terms reflect a genuine commitment from the seller, including their willingness to provide information promptly during due diligence.
10. Take Professional Advice Before Signing
Before finalising Heads of Terms, seek legal and financial advice. Even though the document is not usually binding, it strongly shapes the final contract. Early advice helps you avoid unfavourable terms and gives you a stronger negotiating position.
Heads of Terms are an essential roadmap for any business purchase. They provide clarity, reduce the risk of misunderstandings, and set expectations before you invest time and resources into due diligence. Understanding how to use them to protect your interests will help you move through the buying process with confidence.
If you are actively looking for a business to purchase, familiarising yourself with well-structured Heads of Terms will place you in a stronger, more informed position from the very start of the negotiation journey.