Heads of Terms
Heads of terms are a short document recording the main points a buyer and a seller have agreed before the lawyers draft the full sale agreement — price, structure, conditions, timetable, exclusivity — mostly non-binding, with the exclusivity and confidentiality clauses binding. It is the UK and European name for what a letter of intent is in the US, and the point at which a negotiation becomes a transaction.
- Also known as
- Heads of agreement, HoT, Memorandum of understanding, MoU
- Used at
- the end of the first negotiation, before due diligence, in bilateral deals and at the close of an auction's second round
- Binding
- expressly not, except the clauses that say they are — exclusivity, confidentiality, costs, governing law — and the parties should say which
- Typical length
- three to eight pages; longer heads are a sign the parties are drafting the deal in the wrong document
- Typical content
- enterprise value and how it becomes equity value (cash-free, debt-free, a working capital target); form of consideration and any earn-out or deferred element; structure (shares or assets); conditions such as regulatory approval; the diligence and the timetable; the exclusivity period; who pays what
- Parties
- the buyer and the seller, with advisers drafting; the lawyers take over once the heads are signed
How heads of terms work in practice
The buyer and seller have agreed a price in principle and want to fix what they have agreed before either spends money on diligence and lawyers. The heads set that down in plain terms and, in doing so, flush out what was not agreed: whether the price is before or after debt, whether the earn-out is measured on revenue or EBITDA, who bears the cost of the regulator's approval, whether the founders stay and for how long. Every point settled in the heads is one the lawyers do not have to negotiate in the sale agreement — and every point left vague is one they will.
The binding parts are what the buyer is paying for. Exclusivity — the seller will not talk to anyone else for six to ten weeks — is what lets the buyer commit diligence spend; confidentiality protects both; a costs clause settles who pays if the deal falls through. The non-binding parts still bind in practice: a buyer who signs heads at £50m and offers £42m after diligence had better have a finding that explains the gap, because the seller's advisers will otherwise re-open the process.
For a fintech, heads that name the regulatory approval, its likely timetable and who prepares the application save a month later. Heads that do not mention it are heads written by someone who has not bought a licensed business before.
Example
A buyer and the founders of an e-money institution sign heads of terms: enterprise value €28m, cash-free debt-free, with a normalised working capital target to be agreed in diligence; €22m in cash at completion, €6m deferred over two years subject to the licence remaining in good standing; a share purchase; conditions — the regulator's approval of the change of control and no material adverse change; eight weeks' exclusivity; each side bears its own costs. Diligence finds €0.8m of debt-like items (a safeguarding shortfall the company must top up) and a working capital need €0.5m above the seller's estimate; the buyer proposes €26.7m, the seller accepts €27.2m. The heads held because they said what the price was a price for.
Common mistakes
- Heads that state a price without saying whether it is enterprise or equity value. - Leaving the working capital mechanism to "be agreed", which is where the last million is lost. - Binding language by accident — "the parties agree to sell" — that a court enforces as a contract. - Exclusivity with no end date, or so long that the seller has lost its other bidders when the buyer walks. - Signing heads before the buyer has its financing, so the exclusivity period is spent raising money rather than doing diligence.