The importance of agreeing Heads of Terms at the outset of an agreement for the sale and purchase of a business.

Owner Managers of SME spend their careers waiting for the day to come. This is the day that all the hard work and dedication pays off. The risks they’ve taken going it alone and the dark times can finally be cast to a distant memory.

An acquisitive player in the market place who’s been showing an interest in the business has finally made an offer which matches the asking price.

A sale has been agreed. A deal has been done………………but has it?

“We’ll do this deal the same way that we’ve done it in the past” says the buyer. “We’ve got a model which we always use”.

OK, great. These guys obviously know what they’re doing which should help……..right? Not always.

The temptation is to crack as quickly as possible. The buyer has done this before and is keen to send a full business purchase contract across and send his accountants in to look at the business. Now that the price has been agreed, surely everything else is just detail which will come out in the wash. Not always… fact, hardly ever.

Once a price has been agreed, the next step is to formalise the offer and agree the main terms of the deal by agreeing Heads of Terms. Starting the sale process in earnest without agreeing Heads can often mean that the buyer and the seller plough on, each with their own Heads of Terms in mind. This can simply waste time and costs.

Two Heads in these circumstances aren’t better than one.

The price is only the starting point. There are a number of key terms which need to be agreed before a deal is agreed, even in principle (subject to contract).

Some other key terms are discussed below: –

  • What’s the structure of the deal? The buyer may wish to acquire the business and assets. This reduces risk from the buyer's perspective and acquiring goodwill can be tax efficient for the buyer. However, selling the assets rather than the shares can have significant tax implications on the seller and can extinguish the availability of Entrepreneurs' Relief and an effective 10% tax rate.
  • Does the buyer have the money or is it reliant on bank or investor funding? If funding is required then has approval in principle been received?
  • When will the price be paid? Is the buyer expecting an element of retention to make sure it has cover in respect of any skeletons in the seller’s closet? If money is being paid on a deferred basis how long will the money be withheld for, will there be any security for the outstanding elements of the price? Will the seller receive interest?
  • Is any of the purchase price dependent on the business’ performance following completion (i.e. an earn out)? What control will the seller have over the performance of the business following the sale. Without control, how does the seller achieve the full price he agreed? What is the tax treatment on the earnout?
  • The price has been offered on a “debt free cash free basis”. What does this mean? It’s a term which has become more prevalent and in round terms means that cash in the business is paid in addition to the price and any debt in the business taken off the price. The devil is in the detail however and understanding of “debt free cash free” can vary, even between professionals. How will debtors and creditors be treated for instance and is the buyer expecting cash to be left in the business for working capital? Is this included in the price?
  • How is the “debt free cash free” element worked out and when? If the business has cash reserves in excess of debt when will the seller get the additional money?
  • Is there a property involved? It isn’t uncommon for SME owner managers to have purchased the business’ premises through a personal pension. Will a new lease be entered into on completion? The seller doesn’t want to sell the business only to be left with empty premises to the detriment of his/her pension.
  • Are there any other conditions attached to the deal? Has the buyer identified a key contract? Does the key contract need to be agreed before the sale can complete?

Because of the importance of all of these key terms, there is always the risk that there might be difficult discussions which are required between the parties. Any differences need to be identified at an early stage as there is nothing to be gained from ignoring differences. Any differences won’t become any less important as completion draws near and the pressure on the seller to concede important matters only increases as time goes on. The greater the time and costs which have been invested in the deal and the closer the holy grail of a competed sale becomes can be a dangerous mix.

The most important stage of any corporate transaction is the time between the initial buyer/seller contact and the agreement of Heads of Terms. Sellers can set the parameters and avoid the pitfalls of the buyer’s model. Be in no doubt, the buyer’s model has been developed for the buyer, not the seller.

Ed Nurse is a Director of BHW Solicitors and Heads the Corporate and Commercial Team. In the last 12 months Ed has worked on deals worth in excess of £40m including the sale of the Harrison Murray Group to the Nottingham Building Society, the sale of thankQ (a specialist charity sector software company) to Access Group and the sale of Dealer Auction to multi-national car industry giant Manheim.

If you’re an owner of an SME and are thinking of planning your own exit then please call Ed on 0116 281 6230 or email at

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