Heads of Terms: What They Are and What to Watch Out For

Heads of Terms (HoTs) is the document that turns a buyer's interest into a structured framework for a deal. It sets out the key commercial terms. Price, structure, exclusivity, and conditions. Before the lawyers draft anything binding. Most sellers treat it as a formality. That is a mistake. The HoTs stage is one of the most important points of leverage you will have in the entire process, and once you sign, you will find it very difficult to row back on anything inside it.

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What are Heads of Terms in a UK business sale?

Heads of Terms. Sometimes called a Heads of Agreement. Is the document both parties sign to record the agreed commercial framework before the formal legal process begins. If you have come across the term Letter of Intent (LOI) from US M&A, HoTs is the UK equivalent, though the two are not always identical in how they are used.

The purpose of HoTs is to align buyer and seller on the material terms before either side spends significant money on legal and financial due diligence. In practice, it also signals to the buyer's funders, whether that is a bank, a private equity co-investor, or an acquisition finance provider, that a deal is in play and worth committing resources to.

What's the difference between an indicative offer and HoTs?

These are two distinct stages that sellers sometimes conflate, and the distinction matters.

An indicative offer (sometimes called an Expression of Interest or EOI) is exactly what it sounds like. A buyer saying, in broad terms, what they think the business is worth and how they might structure a deal. It is non-binding, usually brief, and based on limited information. It gets you into the room. It does not constitute an agreement on anything.

Heads of Terms comes later, after initial management meetings and enough information sharing for both parties to agree a workable framework. It is more detailed, includes specific terms, and. Critically. Some clauses within it are legally binding even though the overall document is not.

Do not confuse a buyer's enthusiasm at indicative offer stage with a deal. Many sellers receive flattering indicative offers and assume the hard work is done. The real negotiation happens at HoTs.

What does a typical HoTs document contain?

A well-drafted HoTs will cover the following:

SectionWhat It Covers
Purchase priceHeadline figure. Often expressed as an enterprise value or equity value
Deal structureCash at completion, deferred consideration, earnout, loan notes
Completion mechanismLocked box or completion accounts. Affects final price materially
ExclusivityPeriod during which you cannot speak to other buyers
Conditions to completionWhat has to happen before the deal can close
Due diligence scopeWhat areas the buyer intends to investigate
Indicative timetableExpected timeline from HoTs to completion
ConfidentialityUsually already covered by an NDA, but restated here
Governing lawEngland & Wales in most UK deals

The absence of any of these sections is itself a red flag worth querying before you sign.

Which parts of HoTs are legally binding?

This catches many sellers out. The HoTs as a whole is not a binding contract. But specific clauses within it typically are. The binding provisions in a standard UK HoTs include:

  • Exclusivity. You are legally committed not to negotiate with third parties during the agreed period
  • Confidentiality. Both parties are bound by the NDA terms restated here
  • Costs. Any agreed position on who bears costs if the deal falls over
  • Governing law and jurisdiction

Everything else. The price, the structure, the conditions. Is agreed in principle but subject to due diligence and formal documentation. A buyer can, and frequently does, revisit the price after due diligence. That is the legitimate process. The problem is when the HoTs has been drafted in a way that makes it structurally easy for a buyer to chip the price or introduce new conditions late in the process.

Why does the exclusivity clause matter so much?

When you sign HoTs, you are typically agreeing to deal exclusively with that buyer for a defined period. During that time, you cannot negotiate with anyone else, and you cannot run a parallel process. This is the buyer's period of protection. They are about to spend significant money on due diligence, legal fees, and management time, and they need confidence you will not disappear to a competing bidder.

That is reasonable. What is not reasonable is an exclusivity period that is too long or too loosely defined.

Typical exclusivity periods in UK mid-market deals:

  • 8–10 weeks. Appropriate for a clean, well-prepared business
  • 10–12 weeks. Reasonable if there is complexity (property, earn-outs, regulatory issues)
  • 12+ weeks. Only justifiable in exceptional circumstances; treat this as a red flag

The risk of a long exclusivity period is straightforward: if the deal falls apart at week eleven, you have lost three months, your management team is exhausted, and every other potential buyer has moved on. Agree the shortest exclusivity period that is genuinely workable, and include a provision for what happens if the buyer fails to meet agreed milestones within that period.

What are the common traps sellers miss in HoTs?

Price adjustment mechanisms that favour the buyer

Watch for completion accounts mechanisms that give the buyer wide scope to argue for downward adjustments after completion. A locked box mechanism. Where the price is fixed at a historical balance sheet date. Gives you far more certainty. If a buyer insists on completion accounts, make sure the accounting policies and working capital targets are defined clearly in the HoTs, not left to be agreed later.

Broadly drafted conditions to completion

A condition that the deal is subject to "satisfactory completion of due diligence" with no further definition is a blank cheque. The buyer can use any minor finding to reduce price or walk away. Conditions should be specific. Regulatory approvals, financing confirmation, key customer consents. Not open-ended.

Earnout structures without defined mechanics

If part of the consideration is an earnout (deferred payment tied to post-completion performance), the broad parameters. Measurement period, EBITDA definition, how disputes are resolved. Should be outlined at HoTs stage. Do not let a buyer defer this to the Share Purchase Agreement (SPA). By then, you have spent £50,000–£150,000 on professional fees and your negotiating leverage has weakened considerably.

No cap on the due diligence period

Some HoTs are silent on how long due diligence can run. Without a time limit, a buyer can extend the process indefinitely whilst holding you under exclusivity. Build in a clear end date and, if necessary, a mechanism for terminating exclusivity if the buyer has not committed to proceeding by a defined point.

What should you negotiate at HoTs stage?

This is the most cost-effective point in the deal to negotiate. Professional fees are low, both sides are still motivated, and the buyer has not yet invested heavily in due diligence. The following warrant serious attention before you sign:

  1. The headline price and how it is calculated. Enterprise value vs equity value, and what debt and working capital assumptions are embedded in that number
  2. The structure of any deferred or contingent consideration. The broad mechanics of an earnout, not just the headline figure
  3. The completion mechanism. Locked box vs completion accounts, and if completion accounts, the agreed working capital target
  4. Exclusivity duration and conditions for extension
  5. The scope of due diligence. What is in scope and what warranties you will be expected to give
  6. Conditions to completion. Specific and limited, not broadly drafted
  7. The indicative timetable. Milestones for both parties with consequences for delay
  8. Costs position. Who pays what if the deal does not complete, and under what circumstances

None of this requires full legal drafting at this stage. It requires commercial clarity and, ideally, an experienced M&A adviser who has seen enough deals to know where the traps are.

FAQ

Can a buyer change the price after Heads of Terms are signed? Yes. HoTs is not a binding commitment to complete at the stated price. A buyer can adjust the price following due diligence. This is known as price chipping. The HoTs can be structured to limit the scope for this, but it cannot be eliminated entirely.

How long does it typically take from HoTs to completion in a UK deal? In a well-run UK mid-market transaction, three to five months from HoTs to completion is realistic. Complex deals. Property-heavy businesses, regulated sectors, multi-site operations. Can take six months or longer.

Do I need a solicitor to review HoTs before signing? Yes. The binding clauses. Particularly exclusivity and confidentiality. Have real legal effect. Have a solicitor review the document before you sign, even if the overall negotiation is led by a corporate finance adviser.

What is the difference between HoTs and an SPA? HoTs is the non-binding commercial framework agreed early in the process. The Share Purchase Agreement (SPA) is the full binding legal contract signed at completion. The SPA is drafted by solicitors and is typically 80–150 pages in a mid-market UK deal.

Can I negotiate HoTs without a corporate finance adviser? You can, but it is inadvisable. Buyers negotiate deals regularly. Most sellers do it once. An experienced adviser who has seen the specific tactics a buyer is using will earn their fee at this stage alone.

What happens if I sign HoTs and then want to walk away? Unless there are specific conditions attached, walking away from a deal after signing HoTs may expose you to a claim for costs. The exclusivity clause also prevents you approaching other buyers during the agreed period. Take legal advice before signing anything.

Find Out What Your Business Is Worth

Before you reach the HoTs stage, you need a clear view of what your business is realistically worth. And how buyers will look at it. Use the free valuation calculator at Succession Group to get an indicative range based on your sector, revenue, and EBITDA. It takes less than two minutes and gives you a sensible starting point for any conversation with a buyer.

This article contains general information only and does not constitute financial or tax advice. Every business sale is different. Speak to a qualified UK tax adviser about your specific situation before making any decisions.