Do I need Heads of Terms (HoTs) when selling or buying a business?
The HoTs is a useful document to have at the start of a transaction as it gives the parties the opportunity to discuss and agree the key terms of the transaction. The HoTs are usually not legally binding although they can contain some specifically legally binding provisions such as confidentiality and exclusivity. The types of issues which are usually agreed early on include the purchase price and how it will be paid, the asset being purchased (shares or assets), timetabling, confidentiality, exclusivity, and any matters which are specific to the transaction.
In general there are four approaches to HoTs:
- Don’t have HoTs and negotiate the transaction in the documents. This will save you the cost of preparing the HoTs but can lead to disputes over the terms of the transaction when negotiating the documents.
- Prepare your own HoTs. This will save you on legal fees but it may cause issue later on if a professional adviser has not seen them. Although the HoTs are not legally binding if there is a significant departure from the agreed HoTs this can lead to a breakdown in the relationship with the other party.
- We prepare and negotiate the HoTs. This gives you professional advice from the start of the transaction in order to ensure that it is properly structured and the key issues are agreed. This should hopefully mean less negotiating of the documents.
- We prepare and extensively negotiate the HoTs such that very limited negotiation of the documents is required. This can be used for more complex transaction with multiple parties and structured financial arrangements. Equally, if the negotiations are important (ie sale of a family business which leaves your children working under the new owners) then you may want to work through all the details of the transaction in the HoTs).
In some transactions the parties have decided not to use HoTs, while in others a considerable amount of time can be spent negotiating them in order to limit negotiation of the documents and clarify details of the proposed transaction.
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