Heads of terms are a written summary of the main deal terms before final legal documents. They usually cover price, structure, assets, conditions, due diligence, exclusivity, timetable, confidentiality and handover.
Quick Answer: What are heads of terms?
Heads of terms are a short written agreement that records the main commercial points of a proposed business sale before the buyer and seller move into detailed legal documents.
They are also sometimes called a letter of intent, memorandum of understanding, or offer terms — though the label matters far less than what the document actually says.
Heads of terms are often partly non-binding and partly binding. For example, the agreed price and proposed structure may be expressed as "subject to contract", meaning they are not legally enforceable until formal documents are signed. However, certain clauses — such as confidentiality, exclusivity, and cost arrangements — may be drafted as binding from the moment both parties sign.
A well-drafted heads of terms document helps avoid confusion and wasted expense before both sides commit significant time and money to solicitors, accountants, due diligence and finance arrangements. It creates a shared reference point and a roadmap for the legal process that follows.
It should always be reviewed by professional advisers before signing.
Contents
Why heads of terms matter
When a buyer and seller agree in principle that a deal should happen, it can be tempting to move straight to solicitors and get on with it. That approach often leads to costly misunderstandings.
Heads of terms exist to confirm that the two sides are genuinely aligned on the things that matter most before anyone starts spending serious money. Think of them as a handshake in writing — not legally watertight in every respect, but clear enough that both parties know what they are agreeing to pursue.
Without heads of terms, disputes regularly emerge about:
What the price actually means — upfront versus deferred versus earn-out
Whether the deal is a share sale or asset sale
Which assets are included and which are not
How stock is to be valued and treated
Whether existing debts and cash stay with the seller or transfer
When completion is expected to happen
How long the handover period will last
Whether due diligence findings can reopen price discussions
Whether the buyer has exclusivity during negotiations
What happens to staff under the new owner
Who is responsible for getting landlord consent on the lease
What each party must keep confidential and for how long
Who pays professional costs if the deal falls through
A business sale can become expensive quickly. Legal fees, accountant time, due diligence reports and finance broker costs can run to several thousand pounds even for a modest deal. Heads of terms reduce the chance that both sides spend that money while privately disagreeing on the fundamentals.
They also give solicitors a clear brief. Rather than starting from scratch, a lawyer with a solid heads of terms document can draft the sale agreement around agreed commercial terms rather than having to go back to the parties repeatedly to fill in gaps.
Are heads of terms legally binding?
This is one of the most common points of confusion in business sales. Heads of terms can be:
Entirely non-binding— a statement of intent only, with no legal effect
Partly binding— some clauses enforceable, others not
Mostly binding— nearly all terms create legal obligations
Unclear— which is the most dangerous position to be in
In practice, most heads of terms in UK business sales fall into the second category. The main commercial terms — price, structure, payment schedule — are typically expressed as "subject to contract" and "subject to satisfactory due diligence", meaning they are not intended to bind either party until the final sale agreement is signed. This protects both sides: a buyer who discovers a problem in due diligence is not locked in at the agreed price, and a seller who finds a buyer isn't progressing can walk away.
However, some clauses within the same document may well be binding. These typically include:
Confidentiality— preventing either party from disclosing that a sale is being discussed
Exclusivity— preventing the seller from negotiating with other buyers for a set period
Costs— clarifying who pays professional fees if the deal does not complete
Governing law— confirming which jurisdiction's laws apply
Non-solicitation— preventing one party from approaching the other's staff or customers
Break fees— if included, a financial penalty for walking away without reason
Access to information— governing what the buyer may request and receive
Deposit treatment— setting out what happens to any deposit paid
The document should state clearly and explicitly which clauses are binding and which are not. Vague drafting creates disputes. Do not assume that because something is called "heads of terms" it is automatically non-binding — some heads of terms documents create meaningful legal obligations, and you should know which ones apply to you before you sign.
What should heads of terms include?
The right heads of terms for a business sale will vary depending on the size and complexity of the deal. A sole trader selling a small service business needs different detail than a company selling a multi-site operation with staff, leases and substantial assets.
That said, a practical heads of terms document will typically cover most of the following:
Buyer details— full legal name and contact information
Seller details— full legal name and contact information
Business being sold— trading name, company number if applicable, registered address
Sale structure— share sale, asset sale, or other arrangement
Purchase price— headline figure
Payment structure— upfront, deferred, earn-out, seller finance, or a combination
Deposit— whether one is required, amount, and what happens to it
Stock treatment— included in price, or valued separately
Assets included— list of categories transferring to the buyer
Assets excluded— items being retained by the seller
Debt and cash treatment— whether existing debt transfers or is repaid, whether cash stays with the seller
Working capital assumptions— expected level of working capital at completion
Due diligence conditions— what checks the buyer must carry out
Finance condition— whether the buyer's offer depends on funding approval
Lease and landlord consent condition— whether a lease assignment is needed
Staff and TUPE condition— how employees will be treated
Handover support— what the seller agrees to do post-completion
Timetable— indicative dates for key milestones
Exclusivity period— length and terms
Confidentiality— obligations on both sides
Professional costs— who pays what if the deal fails
Conditions before completion— other items that must be resolved first
Adviser details— names of solicitors and accountants acting for each side
Binding versus non-binding— explicit statement for each clause
The purpose is not to draft a watertight legal contract — that comes later. The purpose is to produce a document clear enough that each side knows exactly what they are working towards and what happens next.
Price and deal structure
The price section is often the most important part of heads of terms, and also the one most prone to ambiguity. A figure written in an email or handshake agreement may mean something quite different to each party.
Price points to cover
A complete price section should address all of the following, even if some elements are zero:
Headline price— the total consideration being offered
Upfront cash payment— what the buyer pays on the day of completion
Deferred payment— any element paid after completion, with timescale and conditions
Seller finance— whether the seller is lending part of the price to the buyer
Earn-out— whether part of the price depends on future business performance
Retention— whether a portion of the price is held back pending warranties or conditions
Stock value— whether stock is included in the headline price or added separately
Cash and debt treatment— whether the business transfers debt-free and cash-free, or with these included
Working capital adjustment— whether the price will be adjusted based on working capital at completion
VAT treatment— whether the sale qualifies as a transfer of a going concern (TOGC)
Completion accounts— whether the price will be confirmed or adjusted after completion based on a set of accounts
Share sale or asset sale
One of the most important things heads of terms should resolve is the deal structure. This shapes almost everything that follows, including which legal documents are needed, which liabilities transfer, how VAT is handled, and how staff contracts are treated.
The options are typically:
Share sale— the buyer purchases the shares of the company, inheriting all its assets and liabilities
Asset sale— the buyer purchases specified assets and contracts, leaving behind the company and its history
Business and asset sale— a form of asset sale where the "business as a going concern" is purchased
Franchise transfer— where the business operates under a franchise agreement requiring franchisor consent
Other structures— such as management buyouts, partial acquisitions, or staged transactions
Each has different implications for both parties, and these need to be understood before the legal process begins. A buyer who assumes an asset sale and a seller who assumed a share sale will find themselves in difficulty if heads of terms did not make this clear.
Example wording
A vague price clause creates problems. Consider the difference between these two examples:
Vague:
Buyer offers £250,000 for the business.
Clear:
The proposed purchase price is £250,000, subject to satisfactory due diligence, finance approval, legal review and agreement of final documents. The transaction is proposed as an asset sale. The price is on a cash-free, debt-free basis with normalised working capital. Stock will be valued separately at completion at cost, subject to a physical stocktake agreed by both parties.
The second version leaves far less room for dispute later.
Due diligence conditions
Buyers should almost always make their offer conditional on satisfactory due diligence. The price agreed in heads of terms is based on the information available at that point — but a detailed investigation of the business may reveal information that affects the buyer's willingness to proceed, or the price they are prepared to pay.
Making the deal subject to due diligence protects both parties. The buyer is not locked into a price that does not reflect reality. The seller benefits too, because a serious and credible buyer who has due diligence rights is more likely to progress quickly and commit.
Common due diligence conditions
Depending on the nature of the business, due diligence may cover:
Financial— accounts, management information, tax position, debtors and creditors
Legal— contracts, litigation history, intellectual property, data compliance
Tax— VAT status, PAYE, corporation tax, any outstanding liabilities
Commercial— customer concentration, supplier dependencies, competitive position
Lease review— terms of any property lease, break clauses, repairing obligations
Landlord consent— whether the landlord must approve the transfer
Staff and TUPE— employee terms, contracts, any tribunal history
Asset verification— confirming that key assets exist and are owned by the business
Stocktake— physical count and valuation of inventory
Finance approval— buyer's lender or investor confirming funding
Regulatory approval— where the business is regulated or licensed
Franchisor approval— for franchise businesses
Licence transfer— where licences are required to operate
Board or shareholder approval— where corporate authorisation is needed
Why due diligence conditions protect buyers
A buyer may agree a price based on information provided by the seller — accounts, profit figures, customer contracts — but due diligence allows independent verification of those claims. It may reveal:
Profits that are lower than presented
Hidden debts or tax arrears
Lease problems that could affect the business
Staff issues such as disputes or redundancy obligations
Assets that do not exist, are encumbered, or belong to a third party
Customer concentration that creates risk
Contracts that cannot be transferred without consent
Regulatory issues or pending litigation
Where any of these arise, the buyer needs to be able to address them — either by renegotiating price, requiring the seller to fix the issue before completion, or walking away.
Why due diligence conditions help sellers too
Sellers sometimes resist due diligence conditions, viewing them as a way for buyers to use the process to reopen the price or delay proceedings. There is some truth to that risk with poorly prepared or uncommitted buyers. But legitimate due diligence conditions also help sellers, because they set realistic expectations from the start. A buyer who completes proper due diligence and then proceeds to exchange is a buyer who is unlikely to raise late objections or seek to renegotiate at completion.
Exclusivity
Exclusivity means the seller agrees, for a defined period, not to negotiate, discuss or enter into an agreement with any other prospective buyer. In return, the buyer commits to proceeding with due diligence and the transaction in good faith.
A buyer typically requests exclusivity because they are about to invest significant time and money — instructing solicitors, commissioning accountants, applying for finance — and they do not want to do so while the seller is simultaneously entertaining competing offers.
Typical exclusivity points to address
Heads of terms should define exclusivity clearly, covering:
Length— how many weeks or months the exclusivity period lasts
Start date— when it begins (typically when heads of terms are signed)
End date— when it expires
What the seller cannot do— should specify that the seller cannot solicit, accept, or discuss offers from other parties
Existing enquiries— whether the seller must pause or wind down ongoing discussions
Buyer's obligations— whether the buyer must demonstrate they are progressing (to prevent using exclusivity as a delay tactic)
Extension— whether exclusivity can be extended and on what basis
Consequences of breach— what happens if the seller negotiates with another party during the exclusivity period
Exclusivity periods in UK business sales typically range from four to twelve weeks, depending on deal complexity. For smaller businesses, four to six weeks is often reasonable. For larger or more complex transactions, longer periods may be needed.
What sellers should consider before granting exclusivity
Sellers should think carefully before agreeing to exclusivity, particularly with buyers they do not know well. Before granting it, consider:
Buyer identity— are you confident this is a credible buyer?
Proof of funds— has the buyer demonstrated they can actually finance the purchase?
Adviser involvement— have they instructed solicitors and accountants?
Due diligence timetable— do they have a clear plan to complete checks within the period?
Genuine motivation— are they progressing because they want to buy, or using exclusivity to delay while exploring other options?
Proposed completion date— is the timetable realistic?
Granting long exclusivity to a weak or uncommitted buyer is one of the more costly mistakes sellers make. It can block serious interest from better-prepared buyers at a critical time.
Staff, lease, stock and assets
One of the most common sources of dispute in business sales is loose language around what is actually included in the deal. Phrases like "everything in the business" or "all the usual assets" are not good enough. Heads of terms should be specific.
Staff
Where employees are involved in the business being sold, the Transfer of Undertakings (Protection of Employment) Regulations 2006 — commonly known as TUPE — may apply. TUPE is a complex area that requires specialist legal advice, but heads of terms should at minimum record:
Whether TUPE is expected to apply to the transaction
Whether the seller will provide employee liability information to the buyer
Whether any employee consultation obligations arise and who is responsible for managing them
Whether retaining specific key staff members is a condition of the deal
At what point staff will be informed about the sale
Ignoring staff in heads of terms creates problems later. If the buyer does not know how many employees are transferring, on what terms, and with what liabilities, they cannot properly assess the deal.
Lease
If the business operates from leasehold premises, the lease is often one of the most significant assets — and one of the most complicated to transfer. Heads of terms should address:
Whether a lease assignment is required as part of the transaction
Whether landlord consent is needed and who will seek it
Who is responsible for the landlord's legal costs in granting consent
Whether a rent deposit is required from the buyer
Whether personal guarantees from the buyer or directors are required
The expected timing for obtaining consent
A deal can fail if a landlord refuses consent or imposes unacceptable conditions. Making the deal conditional on satisfactory lease consent is prudent for both sides.
Stock
If the business holds stock, heads of terms should state clearly:
Whether stock is included in the headline price or priced separately
How stock will be valued — typically at cost
Whether a physical stocktake will take place before completion
Who will conduct the stocktake and how disputes will be resolved
Whether obsolete or slow-moving stock will be discounted or excluded
Leaving stock treatment vague invites a completion-day argument about value.
Assets
Beyond stock, both parties should agree which categories of assets are included in the sale and which are not. This typically covers:
Plant, machinery and equipment
Vehicles
Fixtures and fittings
Website and domain name
Social media accounts
Customer data (subject to data protection rules)
Supplier and customer contracts
Licences and permits
Intellectual property (trademarks, designs, trade secrets)
Cash — usually excluded in an asset sale
Book debts — usually retained by the seller
Personal items belonging to the owner
Any significant asset that is ambiguous should be listed explicitly as either included or excluded. Clarity now prevents disputes later.
Confidentiality and announcements
Business sale discussions should normally remain confidential until both parties are ready to make a disclosure — if at all. Premature announcements can damage a business, unsettle staff and customers, and undermine the seller's position if the deal falls through.
Heads of terms should address:
Confidentiality obligations— what each party must keep private and for how long
Staff communication— when, whether, and how employees will be told about the sale
Customer contact— whether and when the buyer may approach customers
Supplier contact— same for suppliers
Landlord contact— when the landlord is to be informed or approached for consent
Document access— who within each party's organisation can see sensitive documents
Adviser access— what professional advisers are permitted to review
Public announcements— who may make announcements, when, and in what form
Post-failure confidentiality— obligations if the deal does not complete
Two specific points are worth highlighting. First, a buyer should not approach the seller's staff, customers, suppliers or landlord without explicit agreement. Doing so before completion can cause significant damage to the business. Second, a seller should not use information about the buyer's identity or offer to pressure other potential buyers — unless the heads of terms expressly permit them to do so.
Common mistakes
Heads of terms seem straightforward. Many of the most expensive mistakes in business sales happen because one or both parties treated them too casually.
1. Signing without taking advice
Heads of terms can include obligations that bind you legally. Before signing, have a solicitor review the document. This is not excessive caution — it is basic prudence.
2. Not stating what is and is not binding
Ambiguity about which clauses are binding creates disputes. The document should say clearly: "The following clauses are legally binding: [list]. All other terms are subject to contract and not legally binding."
3. Vague price terms
State every element of the price clearly: upfront cash, any deferred element, earn-out, retention, stock and any adjustments. A price written as a single number with no further detail is an invitation to argue.
4. Ignoring VAT and tax
The VAT treatment of a business sale — particularly whether it qualifies as a transfer of a going concern — can have a material effect on both the cost to the buyer and the seller's receipts. Tax implications of share versus asset sales also differ significantly. These points should at least be flagged in heads of terms, even if detailed advice follows.
5. Forgetting lease consent
If the business operates from leased premises, landlord consent to the lease assignment may be a legal requirement. A deal can collapse at a late stage because this was not identified and managed early enough. Always include a lease condition if premises are involved.
6. Granting too much exclusivity to an unprepared buyer
Sellers sometimes feel pressure to grant long exclusivity to demonstrate good faith. This is understandable but can be damaging if the buyer is not ready to proceed. Keep exclusivity periods proportionate to the size and complexity of the deal, and require the buyer to demonstrate readiness before agreeing to extended periods.
7. Weak due diligence conditions
Buyers who accept heads of terms without clear due diligence conditions can find themselves in a difficult position if problems emerge later. Make sure conditions are specific: what checks will be done, over what period, and what happens if they are not satisfactory.
8. Ignoring staff and TUPE
Failing to address staff in heads of terms does not make the issue go away. TUPE obligations, employee information requirements and consultation processes are real and can affect cost, timing and deal structure. They need to be acknowledged early.
9. No handover detail
A seller who agrees to "help after completion" without specifying what, for how long, and whether they will be paid for it is creating a dispute waiting to happen. Heads of terms should set out the expected handover period, the seller's role during it, and any payment arrangements.
10. No timetable
Without agreed milestone dates, deals drift. Due diligence takes longer than expected. Solicitors wait for instructions. Finance applications stall. A basic timetable with target dates for due diligence completion, exchange, and completion helps maintain momentum and gives both sides a shared framework to work to.
Heads of terms checklist
Use this checklist to review heads of terms before signing:
Buyer and seller details are included and accurate.
The business being sold is clearly identified.
The deal structure (share sale or asset sale) is stated.
The headline price is clear.
The payment structure (upfront, deferred, earn-out etc.) is clear.
Stock treatment is addressed.
Included and excluded assets are listed.
Cash and debt treatment is clear.
Due diligence conditions are included.
Finance condition is included if relevant.
Lease and landlord consent condition is included if there are premises.
Staff and TUPE has been considered and addressed.
Handover support is described.
A timetable with key dates is included.
Exclusivity terms are defined clearly.
Confidentiality obligations are included.
Binding and non-binding clauses are clearly distinguished.
Professional advisers have reviewed the document before signing.
FAQs
Are heads of terms the same as a contract?
Not usually. Heads of terms record the proposed deal before a formal legal contract is prepared. However, some clauses within heads of terms — such as confidentiality and exclusivity — may be legally binding. This is why the document must be reviewed carefully before signing.
Should heads of terms be signed before due diligence begins?
Often yes. Heads of terms typically set the basis on which due diligence will be conducted, including conditions and timetable. The buyer should make the deal subject to satisfactory completion of those checks, rather than proceeding unconditionally.
Can the price change after heads of terms are signed?
Possibly. If the price is expressed as subject to due diligence and to the agreement of final documents, then findings from due diligence or negotiations between solicitors may lead to a price adjustment. However, changing the price without clear evidence or good reason tends to damage trust and can cause a deal to collapse. Buyers should only reopen price where there is a genuine and demonstrable reason to do so.
Should the buyer ask for exclusivity?
In most cases, yes. If you are about to spend money on due diligence, legal fees and finance applications, it is reasonable to ask the seller not to negotiate with other buyers during that period. The length and terms should be proportionate.
Do I need a solicitor to review heads of terms?
Yes. Even short heads of terms can create binding obligations and set the commercial framework for the entire transaction. A solicitor will identify ambiguities, assess which clauses may be binding, and advise on whether the terms are sensible before you commit.
What is a letter of intent?
A letter of intent is another term commonly used for heads of terms. The two are largely interchangeable in UK business sales. The label matters less than the content — what counts is what the document actually says and which provisions are binding.
What happens if we cannot agree on heads of terms?
If you cannot reach agreement on the main commercial terms at heads of terms stage, that is usually a sign that the deal may not be viable. It is far better to discover this early than after both sides have spent significant money on legal and professional fees.
Key takeaways
Heads of terms are a critical early step in any business sale. Getting them right reduces cost, avoids misunderstanding and sets the transaction up for a smoother legal process.
The key points to remember are these. Heads of terms summarise the proposed deal before legal documents are drafted. They can be partly binding, and you need to know which parts. Price and deal structure must be set out in full detail — including upfront payments, deferred elements, earn-outs, stock and adjustments. Due diligence conditions protect buyers and create realistic expectations for sellers. Exclusivity should be proportionate, time-limited and granted only to credible buyers. Stock, assets, leases and staff all need specific attention rather than being left to vague language. Confidentiality obligations protect both sides during and after the process. Vague drafting causes disputes that cost money and damage deals. Professional advisers should review the document before anyone signs it.
A good heads of terms document is not a lengthy legal contract. It is a clear, honest record of what both sides have agreed to work towards — and what will happen next.
Related resources
Important disclaimer
Buy a Business Ltd is a marketplace, not a broker. Information, guides, checklists, templates and examples on this site are for general guidance only and do not constitute legal, tax, financial, investment, lending, valuation, brokerage or regulated advice.
Buying or selling a business involves risk. You should seek independent professional advice before buying, selling, valuing, financing or completing a business purchase.
Sources and useful references
The Law Society: exit strategy and heads of terms guidance
Glanvilles: heads of terms in a business sale
GOV.UK: Business transfers, takeovers and TUPE
GOV.UK: Transfer of a business as a going concern and VAT Notice 700/9