Heads of terms explained, clause by clause

Heads of terms go by several names: heads of agreement, a letter of intent, a memorandum of understanding, an LOI. They do the same job. They record what the parties have agreed in principle, so that solicitors can draft the real agreement without having to negotiate the commercial deal at the same time.

They are short, usually three to six pages, and they are the most consequential document you will sign before the sale agreement itself. Not because they bind you on price, since they usually do not, but because after they are signed the negotiation has effectively finished. Everything afterwards is the buyer working out whether to pay what they said they would.

What goes in, clause by clause

1. The parties and the transaction

Who is buying, who is selling, and what is being sold. This clause settles the share sale against asset sale question if it has not been settled already.

It is worth being precise about the selling party. If there are four shareholders, are all four selling, and are all four signing this document? A deal agreed with the majority shareholder and quietly not agreed with the minority is a deal that discovers the problem in week seven.

2. Consideration, and its structure

The price. Read the structure rather than the headline.

| Element | What it means | Who carries the risk | | --- | --- | --- | | Cash on completion | Paid on the day, cleared funds | Buyer | | Deferred consideration | Paid later on a fixed date | Seller | | Earn out | Paid later if the business hits stated targets | Seller | | Loan note | A debt instrument, repayable on terms | Seller | | Retention | Held back against warranty claims | Seller | | Shares in the buyer | Equity rather than cash | Seller |

Every element below the first line is money you have not been paid and may not be. That is not a reason to refuse them, because a structured deal is often the only way a small business sells at all, and an earn out can be worth more than a lower all-cash number. It is a reason to know which parts of the headline are certain.

3. What is assumed about the balance sheet

Usually expressed as cash free and debt free, with a normalised level of working capital.

This means the price assumes the business is handed over with no cash and no borrowing, and with enough working capital to keep trading normally. In practice the cash and debt are adjusted for at completion, and the working capital is compared against an agreed target with the difference settled either way.

The working capital target is a genuinely technical point that moves real money. Set it by reference to an average of recent months rather than a single date, and be aware of seasonality: a target set from a December balance sheet in a business that stocks up for Christmas will not describe a June completion.

4. Conditions

What has to be true for the deal to happen. Commonly: satisfactory due diligence, the buyer's finance, landlord consent to a change of control, any regulatory approval, and third party consents under material contracts.

"Satisfactory due diligence" is subjective by construction and there is limited point fighting it. Landlord consent is the one to think about hardest, because it is outside both parties' control and can take months.

5. Exclusivity

You agree not to talk to other buyers for a stated period. This clause is binding, and it is the one that genuinely costs you something.

The buyer's argument for it is fair: they are about to spend real money on lawyers and accountants and they will not do that while you are still showing the business to others. The risk to you is that you take the business off the market for two months for a buyer who then does not complete, and you go back out with a deal that visibly fell over.

Negotiate three things:

• Length. Six to ten weeks is typical for a small business. Resist open ended.
• Early release. It should end if the buyer withdraws, fails to instruct solicitors within a short window, fails to progress, or seeks to change the price other than for something genuinely discovered in due diligence.
• Scope. It should stop you soliciting other buyers. It should not stop you responding to an unsolicited approach, and it should not survive the period.

6. Confidentiality

Binding, and often the clause that carries over the earlier NDA or replaces it. It should cover the existence of the negotiation, not only the information exchanged. See our guide to confidentiality in a sale for how this fits with staged disclosure.

7. Costs

Each side bears its own. Almost always, and it is binding.

Occasionally a buyer will ask for a break fee if the seller walks away. For a small business sale this is unusual and generally worth declining. Abort costs on a deal of this size are not large enough to justify the argument it creates.

8. Warranties and indemnities, in outline

The heads of terms will say warranties are expected and may flag specific indemnities the buyer wants, typically around tax, litigation or a known issue.

This is the clause sellers skim and should not. If the buyer has flagged an indemnity for something specific, they have told you where they think the risk is, months before the share purchase agreement arrives. That is useful information and it is free.

9. Restrictive covenants

What you agree not to do afterwards: not to compete for a period in a defined area, not to solicit customers or staff, not to use confidential information.

Expect to give them. A buyer paying for goodwill is entitled to expect you not to rebuild the same business next door. Negotiate the duration and the geography rather than the principle. Two to three years is common and courts will not enforce a covenant wider than reasonably necessary to protect the legitimate interest, so an unreasonable one may be worth less to the buyer than they think.

10. Your role after completion

Often a handover period, sometimes a consultancy arrangement, occasionally continued employment.

Be specific. "The seller will assist with a reasonable handover" means nothing and will be interpreted generously by whichever party it suits. Three days a week for two months, then one day a month for four months, with the fee stated, is a term. Vagueness here is how sellers end up working unpaid for a year.

11. Timetable

Target dates for due diligence, first draft of the agreement, exchange and completion. Not binding and worth having anyway, because a deal without a timetable drifts, and drift is what kills small business sales.

12. Subject to contract

The clause that makes the rest of it non-binding. It should be explicit and it should be near the top, not buried.

What to do before you sign

Model the net proceeds. Take the structure, apply the tax, subtract the professional fees, subtract anything being repaid on completion, and look at the number that actually reaches you. Business Asset Disposal Relief, where it applies, gives a relieved Capital Gains Tax rate on qualifying gains up to a one million pound lifetime limit, and that rate is 18 per cent for disposals on or after 6 April 2026, having been 14 per cent in the previous tax year and 10 per cent before that. The structure of the deal affects whether it applies at all, which is why this is a conversation to have with an accountant before signing rather than after.

Decide your walk-away point, in writing, for yourself. Heads of terms is the last moment you can make that decision calmly.

Get it read by a solicitor. It is a short document and a short piece of advice. The exclusivity clause alone justifies it.

And then

Once it is signed, the deal is in the buyer's hands for a while. What you control from here is the quality and the speed of your answers, which is the argument for having the document pack assembled before you ever got to this point.