If you are looking to buy or sell a business, it can be useful to set out the agreed terms at an early stage and this is often done in signed heads of terms (aka a memorandum of understanding). While typically a non-binding moral commitment, certain aspects of the heads might be binding. You should ensure your paperwork and conduct is consistent with the non-binding status and not, for example, act in such a way that demonstrates you intend to be bound by those terms.
More importantly, however, heads of terms makes each party think about the nature of the deal and this helps to flush out any misunderstandings early on. Such issues can then be ‘ironed out’ before the parties enter into a more formal agreement or, if the issues cannot be resolved, the parties can at least decide to withdraw from the deal without having invested significant time and expense.
Heads of terms are particularly useful to bring focus to negotiations on complex transactions, but if the deal is straight forward you may prefer to proceed straight to drafting a formal agreement. The heads should concentrate of the headline issues, but there is a risk that drafting heads can lead to protracted negotiations if the parties get ‘bogged down’ in the minutiae of the deal, which should be left for the main agreement. You should also think about whether entry into the heads might restrict your subsequent negotiations.
For your convenience, we have set out some of the key areas for negotiate on heads of terms below:
1. What are the key conditions for exchange and completion of the deal? What is the time frame?
2. What due diligence (i.e. formal investigation) will be required in respect of, for example, finances and existing business arrangements?
3. What are the material issues? Who needs to be a party to the formal agreement? What is the price and what exactly is being purchased?
4. Who will be responsible for the main procedural and drafting processes?
5. Do you require exclusivity? Should the parties be restricted from negotiating with other parties and, if so, how long should this last?
6. Will you be disclosing confidential information and, if so, how will it be protected?
7. Will any employees need to be informed?
8. Which provisions should be legally binding, such as confidentiality and exclusivity?