Heads of terms when buying a business: exclusivity, conditional price and a deal timeline

What should a buyer put in heads of terms when acquiring a business? Based on my experience acting for numerous buyers, there are three things that matter most: an exclusivity period, a purchase price that is expressly subject to due diligence and a binding sale and purchase agreement, and a timeline of the milestones that lead to completion. Buyers who act strategically have a massive advantage here, because it is business practice for the buyer to draft the heads of terms. That is a unique opportunity to stack the deck in your favour.

What are heads of terms, and are they binding?

Heads of terms are typically a fairly short document. They are also referred to as a letter of intent. They usually cover three main things:

• The intended purchase price for the business.
• How the buyer intends to acquire it. Is this a share purchase or an asset purchase?
• Who the buyer actually is. Are you buying as an individual, through a special purpose vehicle you will set up for the deal, or through your existing company?

In summary, heads of terms are a document the buyer sends to the seller outlining how they intend to buy the business. The word "intend" matters. The price in the heads of terms should be an intention, not a binding offer, and the section below on making the price subject to due diligence explains how to keep it that way. The exclusivity provisions, by contrast, are something you do want the seller to be held to, which is why the template I use puts them in their own schedule for the seller to sign.

Exclusivity period in heads of terms

The first thing to include is exclusivity. Some buyers prefer to put exclusivity in a separate exclusivity agreement. I do not think that is particularly necessary, but the concept is the same either way: you want to be the sole buyer in talks with the seller about the sale and purchase of that business for an agreed period.

The length of that period is very important. In my view you should not accept an exclusivity period of less than three months, and ideally it should be longer than six months. Acquisitions take time, and an exclusivity window that expires before due diligence is finished gives the seller leverage at exactly the wrong moment.

Why buyers need exclusivity

There are three reasons exclusivity is such a valuable thing to include:

• No competition. You will not be bidding against other potential buyers while you do your work.
• A more committed seller. The seller is more incentivised to actually sell the business to you rather than keep their options open.
• Protection for your legal spend. You minimise the risk of another buyer coming in and buying the business from under you, leaving you having wasted money on legal fees that are now unnecessary.

Price subject to due diligence and the SPA

The second thing to include is a statement that the purchase price is subject to due diligence and to a legally binding sale and purchase agreement.

Take an example. You might have offered to buy the business at half a million pounds. That offer should not be a binding one, for two reasons:

• Due diligence comes first. You need to familiarise yourself with the target business and identify any potential red flags. Some of those red flags might justify reducing the purchase price, and you want the freedom to do that.
• The SPA has to be drafted and negotiated. The sale and purchase agreement should ideally contain as many warranties as possible to protect you, and you cannot know what the seller will agree to until that negotiation has happened.

Making the price conditional on both keeps the figure in the heads of terms as a starting point rather than a ceiling you have locked yourself into before you know what you are buying.

Heads of terms template walkthrough

I have put together a heads of terms template, which is available as a free download on this page. I have tried to make it as easy as possible to use, mainly by including a definitions table that you complete with your own information. The structure works like this:

• Definitions table. Terms are defined once in the table and then used throughout the body of the document. A simple example is "Sellers": the letter is addressed to the sellers, and the definition of who they are sits in the table.
• Main body. The substantive heads of terms, which you should review but will ideally not need to amend much.
• Buyer's signature. Where you sign as the buyer.
• Schedule 1: exclusivity agreement. The schedule that grants you exclusivity for the agreed period.
• Seller's signature. The section where the seller signs if they agree.

Fill in the table, check the body, sign and send. The exclusivity schedule is already built in, so you do not need a separate agreement.

Deal timeline and due diligence milestones

The third thing to include is a timeline of events. Very often heads of terms simply record an ideal completion date, the day the business will actually be bought. But there are many steps that need to happen before you reach the point of exchange and completion, and a single target date does nothing to keep them on track.

What I like to do is set out the main milestones that need to be reached before completion and set two dates for each of them. The milestones in a typical share purchase run like this:

• Milestone 1: due diligence questionnaire. Once the heads of terms are signed, the buyer sends the seller a due diligence questionnaire setting out the questions and the documents requested.
• Milestone 2: data room. The seller uploads all the documents the buyer has asked to inspect to a virtual data room.
• Milestone 3: due diligence complete. The buyer finishes reviewing the documents and identifies any red flags.
• Milestone 4: draft SPA. The buyer shares the sale and purchase agreement with the seller to start the negotiations.
• Milestone 5: SPA agreed in principle. The parties settle the terms of the agreement.
• Milestone 6: exchange and completion. The deal is signed and completed.

Setting dates against each milestone means both sides know what is expected of them and when. It also makes delay visible early, which is far better than discovering two weeks before the completion date that the data room was never populated. In my experience deals rarely stall because of one big problem; they stall because nobody owned the next step. A dated timeline in the heads of terms fixes that before the deal has even started.

Before you send the heads of terms

One last point. Before you send heads of terms to a seller, make sure you already know what you will want to ask during due diligence. The questionnaire is the first milestone after signature, and a buyer who has to work it out from scratch at that stage loses time and momentum. You can read more about what to ask in Due diligence questionnaire when buying a business.

Next steps

If you are about to make an offer for a business, draft the heads of terms yourself rather than waiting for the seller, and make sure they include a meaningful exclusivity period, a price that is expressly subject to due diligence and a binding SPA, and a dated timeline of milestones. Speak to a corporate solicitor before you send them, so the document works for you rather than against you once the detailed negotiation begins.