When a formal transfer of business ownership takes place, there is plenty of legal and non-legal documentation involved. Taking steps to understand the various documents you will encounter when selling a business can help vendors and buyers to feel fully prepared. The last thing any party wants is to overlook an important detail or misunderstand the purpose of a document such as the Heads of Terms (HoT) agreement.
If you are a reader of business books or listener of business podcasts, you may also see this document referred to as a Letter of Intent or a Memorandum of Understanding. Not strictly exactly the same, but they broadly serve the same purpose in other countries and are becoming common language in the UK. As we are in the UK, we’ll be using Heads of Terms or HoT for short.
In this blog we’ll explain why the HoT is a significant part of every business sale, outline what the document should include, and how to check if any parts of the document are legally binding.
Let’s start with the basics…
In the initial stages of a business sale, it is common practice to set out the terms of agreement between the parties involved. HoT is a formal way of documenting the vendor’s decision to sell and the buyer’s agreement in principle to purchase. HoT is not intended to cover the finer details of the business sale. Those come later on in proceedings. The HoT outlines the key terms agreed between the parties, prior to execution of the sale process. It sets the stage for negotiation, due diligence, and the final contract agreement.
When HoT is drawn up and signed it demonstrates a commitment from all parties to proceed with the transaction. The document brings clarity and structure to the early part of a business sale and will continue to be of value as legal processes begin.
Throughout negotiations and due diligence, representatives of the parties involved in the transaction will refer back to the HoT to guide discussions and keep the sale process on track. For example, acting as business broker for a vendor, we would use the HoT to inform discussions about the timing and structure of the sale, and a solicitor would use it as a guide to produce the final contract agreement.
The HoT should set out the most important elements of the deal that have been agreed between parties. It should never contain anything surprising.
For a share sale, the Heads of Terms might cover:
For support producing a Heads of Terms agreement for your business sale, get in touch to find your local, trusted Business Partnership business broker.
Some elements of the HoT may be legally binding, but generally the document is not considered a formal legal document. The key term you are looking for here is ‘Subject to contract’. If you see these words then the clause they refer to is not legally binding.
A lot can happen between signing the HoT and deal completion. When a buyer enters due diligence, there is always a chance they will discover information that alters their perception of the business, leading them to renegotiate the terms of the deal.
However, parties may agree for certain clauses to be legally binding. In our experience brokering business sales, there are two clear exceptions, designed to protect the integrity and reputation of the selling business. These enforceable clauses usually relate to confidentiality and communication.
Confidentiality – to protect the intellectual property of the selling business, e.g. Customer information.
Communication – to refrain the buying team from contacting employees, suppliers or customers or disclose any information about the deal before the deal is complete.
If a buyer finds issues during diligence, they have every right to request renegotiation. At this stage the vendor can choose to enter into the process or walk away without penalty.
Potential reasons for renegotiation include:
Each of these is a genuine issue encountered by our business brokers when supporting the sale of a business. None of these issues could have been foreseen prior to Heads of Terms being agreed, and this is by no means an exhaustive list.
The above list highlights why it is essential to do your homework prior to putting your business on the market. Taking action to understand the documentation and processes involved in selling your business will build your confidence and help you feel properly prepared for the journey.
It’s always beneficial to have the right support and guidance to help you prepare and execute a successful sale or purchase, especially if you have queries over whether a document is legally binding or not. If you’re not sure how or where to start, your local business broker is here to help. Find yours here.
Whether you’re selling, buying, or planning for the future, Business Partnership is here to help. Contact us today to speak with your local Regional Partner and start your journey toward success.
Whether you’re selling, buying, or planning for the future, Business Partnership is here to help. Contact us today to speak with your local Regional Partner and start your journey toward success.