Heads of Terms (HoTs) is a non-binding document that summarises the main points of a commercial deal. These are agreed by all relevant parties prior to drafting a formal, and legally binding contract.
A Heads of Terms (HoT) is a document that outlines the key points of a proposed agreement before the formal contract is drafted. It’s sometimes called a letter of intent or a term sheet.
Getting your HoTs right from the start can save you and your team time, money and can prevent deals falling apart mid-process. Here are ten essential points to include:
1. Be Clear on Deal Structure from the Outset
Specify whether the transaction is a share sale or an asset purchase. Each route carries distinct tax, liability and operational implications, and changing the structure mid process is disruptive and expensive.
2. Set Out the Purchase Price and How It Works
Beyond the headline number, outline the pricing mechanism. State whether the consideration is payable in cash, shares, loan notes or in stages (including any earn out structure), and identify adjustments (e.g. working capital or debt-free/cash-free principles).
3. Use “Subject to Contract” Correctly
Ensure the document clearly signals that the commercial terms are not legally binding. This avoids any suggestion of premature contractual commitment while formal due diligence and drafting take place.
4. Identify the Clauses That Are Binding
The point of Heads of Terms is to give comfort to both sides that each is genuine and intends to complete a deal, but without being legally obliged to do so. However, certain provisions should be enforceable from day one, typically confidentiality, exclusivity, and responsibility for costs. Flagging these clearly avoids disputes over what the parties intended to be binding.
5. Secure an Exclusivity Period
Exclusivity protects a buyer’s investment in professional fees by preventing the seller from negotiating with third parties for an agreed period. Set out its duration and any circumstances under which it may be extended.
6. Highlight Key Conditions Precedent
List the matters that must be satisfied before signing or completion, common examples include board or shareholder approvals, regulatory consents, or landlord/major customer approvals.
7. Establish a Realistic Timetable
A target timetable keeps momentum and alignment between advisers. Include indicative dates for due diligence, circulation of drafts, exchange and completion.
8. Address Post Completion Protections Early
Flag any expected restrictive covenants (non compete, non solicitation of customers or staff) or arrangements for ongoing management involvement. This avoids friction when the long form documents are drafted.
9. Scope the Due Diligence Exercise
Use the Heads of Terms to set expectations around the breadth of due diligence both financial, legal, commercial, and operational, and the anticipated logistics (e.g. data room access). Clarity here helps avoid disputes over information flow.
10. Clarify How Costs Will Be Dealt With
The usual position is that each party bears its own professional fees, but if the buyer is expected to contribute to any seller costs or cover abort costs in certain circumstances record this clearly to avoid surprises.
At Branch Austin McCormick, we understand that well drafted HoTs set the tone and foundation of a successful transaction. If you or your business needs legal support to ensure you are fully prepared before a deal, reach out to Martin Donoghue in our Corporate & Commercial team at md@branchaustinmccormick.com.