When 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 (Also known as a memorandum of understanding or letter of intent). While typically a non-binding moral commitment, certain aspects of the heads might be legally binding.
More importantly, however, heads of terms make each party consider the nature of the deal which 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 decide to withdraw from the deal without having invested significant time and expense.
Heads of terms are particularly useful to bring into focus the 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 on the headline issues, as there is a risk that drafting heads could lead to protracted negotiations, you should avoid getting ‘bogged down’ on the minutiae of the deal, which is better left for the main agreement. You should also think about whether entering into the heads might restrict your subsequent negotiations. Whilst on the whole, they won’t be legally binding, they will create an understanding between the parties which could make it difficult to backtrack or re-negotiate in the future.
For your convenience, we have set out some of the key areas for negotiation on heads of terms:
1. What is the time frame for completion? Is it realistic?
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? If any part of the price is deferred, what security is being offered? Will interest be paid?
4. Do you require exclusivity? Should the parties be restricted from negotiating with other parties and, if so, how long should this last?
5. You will almost certainly be disclosing confidential information. How will it be protected?
6. If you have employees, they will need to be informed at some point and proper advice should be obtained.
7. Are there any provisions which should be legally binding, such as confidentiality and exclusivity?