Do I need to agree heads of terms when selling or purchasing a business?
Have you agreed to purchase or sell a business in principle? If so then making sure suitable heads of terms are in place at the outset can save you time, money, stress and (very importantly) minimise the risk of a fallout that could derail the transaction.
Heads of terms (also known as memorandums of understanding) are used in the sale or purchase of actively trading businesses for two main objectives. Firstly, to ensure that all parties involved are on the same page on the core terms of the deal. Secondly, to legally bind all parties on a number of issues, including to keep details of the transaction confidential and for the seller to deal exclusively with the buyer for an agreed period of time.
Businesses are naturally complicated and, as such, it helps to have a structure in place to keep the negotiations on track. Hidden deal breakers such as what security is required, who will receive or retain certain assets of a business, or how the deal will be financed can easily be missed out of initial discussions. Without detailed heads of terms in place these could go undiscussed until significant time, effort and costs have been spent by all parties moving the transaction forward.
Heads of terms act as a first high level negotiation at an early stage and flush out any misunderstandings early on, potentially saving thousands in costs if plans don’t work out. These main commercial terms are not normally legally binding however, so if something changes or is uncovered, nobody is locked into a bad deal.
Despite the main commercial terms not being legally binding, it is common practice to bind the parties over certain points. It may seem premature to be signing legally binding contracts, but without them the transaction (or you personally) is exposed to unnecessary risks. What if the seller announces it is being bought before the buyer has fully decided? What if the seller is negotiating with another buyer despite solicitors already having been engaged and significant costs incurred?
Heads of terms will legally bind the parties on these sorts of issues and give everyone involved the space to negotiate the rest of the deal in good faith.
Common factors to consider in heads of terms include:
- Whether assets or shares are being purchased (and is anything excluded)
- The purchase price and timings (e.g. full payment at completion) and what does this include
- Whether the purchase price is to be adjusted based on the financial position of the business at the time of completion
- If there is deferred consideration, is security required (such as personal guarantees)
- Key conditions that must not change between the heads of terms and completion
- A timetable for the transaction
- Due diligence to be undertaken
- Exclusivity timeframe (commonly legally binding)
- Confidentiality clauses (commonly legally binding)
- Costs – normally both parties meet their own costs
- Whether any deposit will be paid and if so, on what terms.
- Governing law in case of dispute
If you require any assistance or advice on buying or selling a business, including the drafting of heads of terms, please either call 01752 203500 or email me directly via james.peterson@GAsolicitors.com