TL;DR. Heads of terms record the deal you have agreed in principle, before solicitors spend weeks turning it into a share purchase agreement. Most of the document does not bind anyone, but the price mechanism, the payment structure and the exclusivity period you accept here are very hard to change later. Below: what heads of terms are, which clauses bind, a clause-by-clause guide for sellers, and a free template you can download as a Word file.
This guide is written for owners and advisers selling a UK company or business; for the whole process, from preparation to completion, see how to sell a business in the UK. Commercial property leases use heads of terms too, with different content (rent, term, break clauses, repairs), so if you are leasing premises the template below is not the one you need.
Fill in your deal in the heads of terms builder: it numbers the clauses, separates the binding ones, flags the terms that cost sellers most, and downloads as Word. Or take the blank template below. No email, no signup.
Open the builder Blank Word templateWhat are heads of terms?
Heads of terms (often shortened to HoTs) are a short document, usually two to five pages, that sets out the main terms of a deal both sides have agreed in principle. In a business sale they record who is buying what, for how much, how the price is paid, what has to happen before completion, and how long the buyer gets to investigate the business.
They exist because the full contract takes weeks and costs real money in legal fees. Neither side wants to start that work until the headline terms are settled. Heads of terms are that settlement.
You will see the same document under other names:
- Heads of terms or heads of agreement, the usual UK names.
- Letter of intent (LOI), the usual US name, often written as a letter from the buyer.
- Term sheet, common in venture and private equity investment.
- Memorandum of understanding (MOU), common in joint ventures and public sector deals.
Whatever the title, the document is normally headed subject to contract, which signals that the parties do not intend to be bound by the commercial terms until a formal contract is signed.
Are heads of terms legally binding?
Mostly not, and that is deliberate. The commercial terms are agreed in principle only. They become binding when the share purchase agreement (SPA) or asset purchase agreement is signed. A small number of clauses are written to bind from the day the heads of terms are signed, because they protect one side while the deal is being worked on.
| Clause | Usually binding? | Why |
|---|---|---|
| Price, structure and payment terms | No | Agreed in principle, finalised in the SPA |
| Due diligence scope and timetable | No | A target, not an obligation |
| Conditions to completion | No | Restated as conditions in the SPA |
| Warranties, covenants, seller’s role | No | Negotiated in detail in the SPA |
| Exclusivity | Yes | Protects the buyer’s spend on advisers |
| Confidentiality | Yes | Protects the seller’s information |
| Costs | Yes | Settles who pays if the deal fails |
| Governing law and jurisdiction | Yes | Says which courts decide a dispute about the binding clauses |
Two points of English law matter here.
First, an agreement simply to negotiate in good faith is generally not enforceable. In Walford v Miles (1992) the House of Lords held that a bare promise to negotiate was too uncertain to enforce, while a lock-out for a defined period can be. That is why a well drafted exclusivity clause has a fixed end date and a clear list of what the seller must not do.
Second, the label is not a guarantee. In RTS Flexible Systems v Molkerei Alois Müller (2010) the Supreme Court found a binding contract despite subject to contract wording, because the parties had gone on to perform as though everything was agreed. In a business sale this risk is small if nobody acts on the deal before the SPA is signed, but the heads of terms should still say plainly which paragraphs bind and that the rest do not.
What should heads of terms include when you sell a business?
These are the clauses a seller should expect to see, in roughly the order they appear.
| Clause | What it records | What the seller should watch |
|---|---|---|
| Parties and the company | Seller, buyer, company or business being sold | Use registered names and numbers, and name every selling shareholder |
| Structure | Share sale or asset sale | Changes tax, employees and contract consents (see the table below) |
| Price | Headline price and the basis it is quoted on | Cash-free, debt-free, a normal level of working capital, and the mechanism that adjusts it |
| Payment | Cash at completion, deferred payments, earn-out, retention | Dates, amounts, and how each part is secured |
| Due diligence | Areas the buyer will review and the deadline | A scope and an end date, not open-ended investigation |
| Conditions | What must happen before completion | Every condition named now, so none appear late as leverage |
| Warranties and indemnities | The promises you will give about the business | Caps, time limits and the de minimis level |
| Seller’s role | Handover or employment after completion | Length, pay and what happens to an earn-out if you leave |
| Employees | What happens to staff | TUPE in an asset sale, nothing changes in a share sale |
| Restrictive covenants | Non-compete and non-solicit on the seller | Duration, territory and the activities covered |
| Timetable | Target dates and a long-stop date | A long-stop date that ends the deal if it drags on |
| Exclusivity (binding) | How long you stop talking to other buyers | Fixed weeks, with early termination rights |
| Confidentiality (binding) | Who may see what, and who the buyer may contact | No contact with staff, customers or suppliers without consent |
| Costs (binding) | Who pays advisers | Normally each side pays its own |
| Governing law (binding) | Law and courts | England and Wales, or Scotland if that is where you are |
Share sale or asset sale: what changes?
The structure line is a single sentence in the heads of terms, but it changes most of what follows. Sellers usually prefer a share sale; buyers often prefer an asset sale because they can choose which assets and liabilities to take.
| Share sale | Asset sale | |
|---|---|---|
| What transfers | The company, with all its assets and liabilities | Chosen assets and agreed liabilities |
| Employees | Stay employed by the company | Transfer to the buyer under TUPE |
| Customer and supplier contracts | Stay with the company, subject to change of control clauses | Must be assigned or novated, usually with the other party’s consent |
| Who receives the money | The selling shareholders | The company, which then has to distribute it |
| Buyer’s transfer tax | 0.5% stamp duty on the price of the shares | SDLT on any property, and VAT on assets unless the sale is a transfer of a going concern |
| Due diligence focus | Everything the company has ever done | The assets and contracts being bought |
Take tax advice before agreeing the structure and the split of the price between cash, deferred payments and earn-out. The tax treatment of each part differs, and it is far easier to shape in the heads of terms than to fix in the SPA.
How do sellers protect themselves in heads of terms?
The buyer’s first draft will be reasonable but written from the buyer’s side. These are the points that cost sellers most when they are left vague.
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Put a date on exclusivity, and an exit. Grant a fixed number of weeks, not “until the SPA is signed”. Ask for exclusivity to end immediately if the buyer withdraws, misses an agreed milestone, or proposes a lower price. Without that last trigger, the end of exclusivity is the moment a buyer is most tempted to renegotiate.
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Agree the price mechanism now. With a locked box, the price is fixed by reference to a balance sheet at an agreed past date, and the buyer is protected by a promise that no value leaks out of the company after that date. With completion accounts, accounts are drawn up after completion and the price moves up or down for actual cash, debt and working capital. Both work. What does not work is leaving the choice, or the working capital target, for the lawyers to argue about later.
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Define the earn-out or leave it out. An earn-out that says “up to £500,000 based on performance” is a dispute waiting to happen. Name the metric (revenue, gross profit, EBITDA), the period, the accounting policies used to measure it, and what happens if the buyer changes how the business is run or sells it before the earn-out ends.
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Give due diligence a scope and a deadline. List the areas (financial, tax, legal, commercial, IT, HR) and the date diligence ends. An open-ended review keeps you exclusive to one buyer while your other options cool.
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Name every condition. Third party consents under change of control clauses, landlord consent for a lease assignment, regulatory approvals, and a notification under the National Security and Investment Act 2021 if the business is in one of the sensitive sectors. A condition that first appears in the SPA is a lever against you.
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Control who the buyer talks to. The confidentiality clause should stop the buyer contacting your employees, customers or suppliers without your written consent. Most deal leaks start with a well meant call to a customer. If nothing was signed before the teaser went out, put an NDA in place before you share anything else; the free NDA template builder produces a UK one for a business sale in a few minutes.
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Have your documents ready before you sign. The day heads of terms are signed, the buyer’s solicitor and accountant send a due diligence request list, often well over a hundred items. Every day you spend finding contracts, leases and board minutes is a day off your exclusivity window, and slow answers are read as a sign of problems. Building the data room before signing turns that list into a checklist you have already worked through.
Heads of terms, letter of intent, MOU or term sheet?
| Name | Where you see it | Usual form | Binding? |
|---|---|---|---|
| Heads of terms | UK business sales, leases, joint ventures | Short document signed by both sides | Mostly not, with named binding clauses |
| Letter of intent | US deals, and UK deals with US buyers | Letter from the buyer, countersigned by the seller | Same as heads of terms |
| Term sheet | Venture capital and private equity investment | Table of terms, often non-binding | Mostly not, with named binding clauses |
| Memorandum of understanding | Joint ventures, partnerships, public sector | Document signed by both sides | Usually not binding at all |
If a US buyer sends you a letter of intent for a UK company, treat it exactly as you would heads of terms: the same clauses, the same review, the same care over which paragraphs bind.
What happens after heads of terms are signed?
Timings vary with the size of the business and how ready the seller is, but a UK SME sale with organised documents often follows this shape.
| Stage | Typical timing | What happens |
|---|---|---|
| Heads of terms signed | Week 0 | Exclusivity starts and the buyer instructs advisers |
| Due diligence request list | Weeks 0 to 1 | The buyer’s solicitor and accountant send their lists; the seller populates the data room |
| Due diligence | Weeks 1 to 6 | Questions and answers, site visits, management meetings, draft reports |
| SPA and disclosure letter | Weeks 3 to 8 | The buyer’s solicitor drafts the SPA; the seller’s solicitor prepares the disclosure letter against the warranties |
| Exchange and completion | Weeks 8 to 12 | Often on the same day for a private company sale, unless conditions need time |
The stage that slips most is due diligence, and the most common reason is the seller’s documents. A structured data room, opened before the heads of terms are signed, is the single biggest lever a seller has on the timetable.
Free heads of terms template for a UK business sale
The template below covers a sale of shares in a UK private company, with alternative wording where an asset sale differs. Paragraphs 1 to 10 record the commercial terms and are not binding. Paragraphs 11 to 15 bind from signature. Replace everything in square brackets, delete the alternatives you do not need, and have your solicitor review the result before anyone signs it.
This template is a starting point, not legal advice. It is written for England and Wales; if the company is Scottish, ask a Scottish solicitor to adapt the governing law and any property terms.
Download it as a Word file and edit the square brackets directly. Opens in Word, Google Docs and Pages.
Download the Word templateHEADS OF TERMS
Proposed acquisition of [Target Company Limited]
Subject to contract. These heads of terms are not legally binding, except for paragraphs 11 to 15, which bind the parties from the date of signature.
Date: [date]
Seller: [full name of each selling shareholder], of [address] (together, the Seller)
Buyer: [Buyer Limited], company number [number], whose registered office is at [address] (the Buyer)
Company: [Target Company Limited], company number [number], whose registered office is at [address] (the Company)
1. Transaction. The Buyer will acquire [the entire issued share capital of the Company] [OR, for an asset sale: the business and assets of the Company carried on as [business description], as a going concern].
2. Price. The price is £[amount] on a cash-free, debt-free basis, assuming a normal level of working capital of £[amount]. The price will be fixed by reference to [a locked box balance sheet at [date], with no leakage after that date other than permitted leakage to be agreed] [OR: completion accounts prepared within [60] days after completion, with a pound-for-pound adjustment for cash, debt and working capital].
3. Payment. The price will be paid as follows: £[amount] in cash at completion; £[amount] as deferred consideration on [date or dates], [secured by [a parent company guarantee] [OR: a retention held in a joint solicitors’ account]]; and [an earn-out of up to £[amount], calculated as [metric] for the [12] months ending [date], measured using the Company’s existing accounting policies and paid within [30] days of the earn-out accounts being agreed].
4. Due diligence. The Buyer will complete financial, tax, legal, commercial and [IT and HR] due diligence within [6] weeks of the date of these heads of terms. The Seller will provide information through a virtual data room and will aim to answer questions within [3] business days.
5. Conditions. Completion will be conditional on: satisfactory due diligence; [the consent of [counterparty] under the change of control provisions of [contract]]; [the landlord’s consent to [assignment of the lease] [OR: the change of control of the tenant] of [property]]; and [clearance under the National Security and Investment Act 2021, if a mandatory notification is required].
6. Warranties and indemnities. The Seller will give warranties customary for a transaction of this size. Claims will be limited to [100]% of the price for title and capacity warranties and [X]% of the price for all other warranties, with time limits of [18 to 24] months for general warranty claims and [7] years for tax claims, and a de minimis of £[amount] per claim. [The Buyer may take out warranty and indemnity insurance at its own cost.]
7. Seller’s role after completion. [Name] will remain with the Company as [managing director] for a handover period of [6] months from completion on terms to be agreed [, and the earn-out will not be affected if the Company ends that role without cause].
8. Employees. [Share sale: the Company’s employees will remain employed by the Company.] [OR, for an asset sale: the employees assigned to the business will transfer to the Buyer under the Transfer of Undertakings (Protection of Employment) Regulations 2006.]
9. Restrictive covenants. The Seller will not, for [24] months from completion and within [the United Kingdom], compete with the business of the Company, solicit its customers, or solicit or employ its senior employees.
10. Timetable. The parties will aim for: due diligence completed by [date]; a first draft share purchase agreement from the Buyer’s solicitors by [date]; and completion by [date]. If completion has not taken place by [long-stop date], either party may end negotiations by written notice.
11. Exclusivity. For [6] weeks from the date of these heads of terms (the Exclusivity Period), the Seller will not solicit, encourage, negotiate or agree any sale of the Company, its shares or its business with anyone other than the Buyer. The Exclusivity Period ends immediately if the Buyer notifies the Seller that it does not wish to proceed, or proposes any reduction to the price in paragraph 2 or any material change to the payment terms in paragraph 3.
12. Confidentiality. Each party will keep these heads of terms, the negotiations and all information received from the other party confidential, and will use that information only to evaluate and complete the transaction. The Buyer will not contact any employee, customer, supplier or landlord of the Company about the transaction without the Seller’s prior written consent. [The confidentiality agreement dated [date] continues in force.]
13. Costs. Each party will pay its own costs in connection with the transaction, whether or not it completes.
14. Non-binding effect. Except for paragraphs 11 to 15, nothing in these heads of terms creates a legally binding obligation. No party is bound to proceed with the transaction until a share purchase agreement [OR: asset purchase agreement] has been signed by all parties.
15. Governing law and jurisdiction. These heads of terms, and any dispute or claim arising from them, are governed by the law of England and Wales, and the courts of England and Wales have exclusive jurisdiction.
Signed for and on behalf of the Buyer: [signature, name, title, date]
Signed by the Seller: [signature, name, date]
How Beamprobe fits
Heads of terms start a clock. From signature, everything the buyer needs to see has to be found, organised and shared, and every document you share is one you may later need to prove the buyer received. Beamprobe is a UK virtual data room built for that stage: per-recipient links so you know which adviser opened what, an NDA gate and audit log on Pro, and UK/EU data residency, from £29 a month with no per-user fees.
If you are not ready to open a room yet, start with the free M&A data room index builder. It lays out the folders a UK buyer’s solicitor expects, so you can work through the request list before it arrives.