What a heads of terms really decides in a business sale

A heads of terms is the short document recording what a buyer and a seller have agreed in principle before the lawyers write the sale contract — the price and how it is paid, what is actually being bought, the timetable, and what each side may and may not do while the deal is prepared. It is almost always headed subject to contract and described as non-binding, and it is still the most consequential page in the whole sale, because every number written into it becomes the point the rest of the deal is negotiated down from, and almost never up. This page is the commercial explainer: what each line is deciding in money, what a seller is really agreeing to, and which points cost the most later if they are conceded early. It is deliberately not a template, it does not draft anything, and it will not tell you what your document should say — drafting and reviewing it is work for your own solicitor. The value of reading it is that you walk into that solicitor’s office already knowing what you are negotiating, instead of finding out three months later what you gave away.

What a heads of terms is, and what this page will not do

Somewhere between a buyer saying “we are interested” and a solicitor producing a share purchase agreement, the two sides write down what they think they have agreed. That document is the heads of terms. It goes by several names — heads of agreement, letter of intent, memorandum of understanding, term sheet, HoTs — and for practical purposes they do the same job. It is short. Two to six pages is normal for a small-business sale. It is written in ordinary language rather than contract language, and it exists so that the expensive part of the process, the legal drafting and the due diligence, starts from a shared understanding rather than from a series of surprises.

Here is the thing worth being very clear about before you read another line. This page does not give you a template and does not tell you what your heads of terms should say. That is not coyness. A heads of terms is a document that a solicitor who knows your business, your circumstances and the specific buyer in front of you should draft and review. The wording matters enormously, and the difference between two sentences that look almost identical can be the difference between a deal that works and one that does not. Anything written as a general-purpose form of words, by anyone, cannot know what your deal requires.

What this page does instead is the part that nobody explains and that costs sellers the most money: what each item in a heads of terms is actually deciding, in pounds. By the time the document is signed, most of the commercial outcome of the sale has been settled. The negotiation that follows is not about whether you get what you agreed — it is about how much of what you agreed survives diligence. If you did not understand what you were agreeing to at heads stage, you will spend the next three to six months discovering it one clause at a time, from a position with no leverage left.

Most sellers arrive at this document having thought hard about exactly one thing: the price. They have a number in their head, the buyer has offered a number, and when the two numbers meet there is a handshake and a sense that the hard part is over. It is not. The headline price is the least informative number in the entire document, for reasons the next section works through with real arithmetic.

Before any of that, the sequence that reduces the damage. Value the business privately and get your own defensible range, which is what the free business valuation calculator is for. Understand what the lines below are deciding. Then engage a solicitor and an accountant, before you sign a heads of terms rather than after. Sellers routinely sign heads of terms without legal input on the grounds that it is “only non-binding”, and then pay for that decision for the rest of the transaction. The broader sequence of the sale, from preparation through to completion, is set out in the guide on how to sell a business.

One more framing point. A heads of terms is not a hostile document and a buyer proposing a structure you dislike is not acting badly. A buyer is trying to reduce the risk of paying for something that turns out not to be what it looked like, and every mechanism in this page — deferral, earn-out, retention, working capital adjustment, exclusivity — exists to shift some part of that risk onto the seller. That is a legitimate negotiation. It only becomes a problem when one side understands the mechanisms and the other does not.

The price is four numbers pretending to be one

When a heads of terms says the consideration is £2,400,000, it is not telling you what you are being paid. It is telling you the largest amount you could conceivably receive if everything goes to plan. What you actually receive, and when, depends on how that figure is split, and the split is where the entire value of the negotiation sits.

There are four components, and almost every small-business deal is some combination of them:

Now watch what happens when two buyers offer the same headline number. Both of the offers below are, in the language a broker would use, “an offer of £2.4 million”. The figures are illustrative, chosen to make the arithmetic legible, not a market rate or a suggested structure.

The difference in money on the day of completion is £1,700,000 − £1,080,000 = £620,000. That is 26% of the headline price, and it is the difference between two offers that a seller describing them to a friend would call identical.

It gets wider when you ask what each one is likely to be worth in the end. Nobody can tell you how often an earn-out pays out in full, and this page is not going to invent a statistic. What you can do — what you should do before agreeing anything — is run your own structure at three outcomes and look at the spread:

Check the arithmetic yourself. Buyer A at half: £1,800,000 + £300,000 + (£300,000 ÷ 2) = £2,250,000. Buyer B at half: £1,080,000 + £420,000 + (£900,000 ÷ 2) = £1,950,000. At nothing, Buyer A is £1,800,000 + £300,000 = £2,100,000 and Buyer B is £1,080,000 + £420,000 = £1,500,000.

Buyer B’s offer ranges from £1,500,000 to £2,400,000 depending on events that will happen after you have handed over the keys. Buyer A’s ranges from £2,100,000 to £2,400,000. If the heads of terms records nothing but “consideration: £2,400,000, structure to be agreed”, you have agreed to a number that could mean either of these, and you have agreed it before you have any information about which one the buyer intends.

This is the single most expensive mistake available at heads stage, and it is worth stating as a rule: a headline price agreed without its structure is not an agreement about money at all. It is an agreement about the largest number either party will say out loud for the rest of the process, and from that moment your job is defensive. Settle the split — how much cash on the day, how much deferred and on what dates, how much at risk on an earn-out, how much held back and for how long — in the same conversation as the headline, or you have conceded the argument before it started.

A related trap: the buyer who moves quickly to your number. A seller who names £2.4 million and hears “agreed” within a day usually feels they have done well. Sometimes they have. Often what has been agreed is a headline, by a buyer who intends to build the structure afterwards and who now has your ceiling in writing.

Shares or assets, and the cash, debt and working capital lines

The second thing a heads of terms settles is what is being sold, and this is where a number of sellers discover that the money reaching them is materially less than the number they agreed, for reasons that were never argued about because nobody raised them.

There are two fundamental shapes. A share sale means the buyer buys the company itself, and with it everything the company owns and everything it owes. An asset sale means the buyer buys selected things out of the company — the customer list, the equipment, the stock, the brand, the goodwill — and the company, along with whatever is left in it, remains yours. The commercial consequences run in opposite directions for the two sides, which is why it is usually the first real disagreement in a deal:

Which shape is right for you is not a question this page can answer, and it has consequences well beyond the commercial ones — it is precisely the sort of question to put to your solicitor and your accountant together, early, because the answer changes how the rest of the heads of terms has to be written.

Now the mechanic that catches people. In most share sales the price is agreed on what is called a cash-free, debt-free basis. What that phrase means in practice is that the number you shook hands on is a valuation of the trading business, and it then has to be converted into a number that lands in your bank account:

Cash at completion = enterprise value + cash in the business − debt and debt-like items − any working capital shortfall − anything held back

Work it through on the same £2,400,000. Again, illustrative figures, chosen so the sum is checkable. Suppose the business makes £600,000 of EBITDA and the parties have agreed a 4× multiple, giving an enterprise value of £2,400,000. At completion the company has £180,000 in the bank, and it owes £250,000 on a bank loan, £60,000 on asset finance and £95,000 drawn on invoice finance. The parties have agreed that a “normal” level of working capital for this business is £320,000, and on the day it is £275,000.

The headline was £2,400,000. The figure is £2,130,000, a difference of £270,000, and not one pound of that difference came from a negotiation about price. It came from definitions.

Two of those definitions deserve particular attention because they are where the money moves quietly.

What counts as debt. Bank loans are obvious. Beyond that, buyers commonly treat a range of other items as debt-like — asset finance, invoice finance drawn, overdrafts, amounts owed to directors, unpaid dividends declared, accrued but untaken holiday, deferred payment arrangements, sometimes a known repair liability on a leased property. Each item a buyer succeeds in classifying as debt is a pound off your proceeds. If the heads of terms says “on a cash-free, debt-free basis” and stops there, the list is being written later, by the buyer, with your money. The specific case of a business that carries real borrowing is worked through in the guide on selling a business with debt.

Where the normal working capital line is drawn. This is the one almost nobody negotiates at heads stage, and it is pure price. In the sum above, the parties set normal working capital at £320,000 and the actual was £275,000, costing the seller £45,000. Suppose instead the agreed normal level had been £260,000. Then the actual figure of £275,000 is £15,000 above normal, and the adjustment runs the other way:

A £60,000 swing, from a single line that reads like a piece of accounting housekeeping. Sixty thousand pounds is more than most sellers argue over on the multiple, and it is decided by where a line is drawn on a definition that is usually settled in a sentence.

The practical point is not that you should fight every one of these. It is that they are price terms wearing the clothing of technical detail. If your heads of terms defers all of them to “to be agreed”, you have agreed a price with a six-figure hole in it, and the hole will be filled during diligence, when you no longer have a second buyer.

Exclusivity, and what a seller hands over to grant it

Almost every heads of terms contains an exclusivity period: a stretch of time during which the seller agrees not to talk to, negotiate with, or accept an offer from anyone else. The buyer asks for it because they are about to spend real money on lawyers and accountants examining your business, and they do not want to do that in a race. That is an entirely reasonable request. It is also, in money terms, the largest single thing a seller gives away in the entire document, and it is given away for free.

Whether and how such a clause operates as a matter of law is a question for your solicitor, and it is one of the specific things to raise with them when you put the document in front of them. What this page can tell you is what happens commercially, which is the same in every deal and which the arithmetic makes plain.

Here is the sequence. Take a seller with three interested parties. Buyer A offers £2,400,000 and asks for twelve weeks of exclusivity to complete their due diligence. The seller agrees, because the alternative is losing the best offer on the table. Buyers B and C are told the business is under offer. One of them buys something else within the month; the other moves on to other things and stops returning calls.

In week nine, the diligence report arrives. It has found things — it always finds things, because any business examined closely enough has them. The largest customer represents a large share of revenue and has no contract. The property lease has a renewal coming with a dilapidations liability nobody had quantified. Stock has been valued on a basis the buyer’s accountant disagrees with. Two key staff have no written contracts. None of these are scandals. They are ordinary features of an ordinary owner-managed business.

Buyer A now says, reasonably and without raising their voice, that in light of the findings the price needs to come down to £2,160,000. That is a 10% reduction: £2,400,000 × 0.90 = £2,160,000, a chip of £240,000. This is what is meant by price chipping, and the reason it works has nothing to do with the findings and everything to do with week one, when the competing buyers were sent away.

Look at the seller’s choice in week nine as a sum. The figures are illustrative:

Put like that, most sellers accept, and they are not being weak. Accepting is usually the rational answer at week nine. The mistake was not made in week nine. It was made in week one, and it can be priced.

Twelve weeks of exclusivity produced a £240,000 reduction. That is £240,000 ÷ 12 = £20,000 per week of exclusivity granted. Obviously this is arithmetic after the fact rather than a rate anyone quotes, and your deal will produce a different figure. But run the sum on your own numbers before you agree a period, because it converts an abstract concession into a figure you can actually weigh. If you are being asked for sixteen weeks rather than eight, ask yourself what the additional eight weeks are worth to the buyer, and why they should be free.

Three things follow, and they are commercial rather than legal:

• The length is negotiable and the length is the price. A buyer asking for a long period is asking for a long period in which you have no alternative. Shorter periods with the option to extend by agreement keep you in the conversation.
• What triggers the clock matters. Exclusivity that starts when the buyer has their funding confirmed and their advisers appointed is a different concession from exclusivity that starts the day you sign and is then consumed by the buyer getting organised.
• The best defence against a chip is diligence you have already done yourself. Everything a buyer finds in week nine was findable by you in week minus four. Contracts in writing, stock valued consistently, leases understood, key-person dependency addressed — each item you fix in advance is an item that cannot be used to reprice you later. That preparation work is what the readiness side of the toolkit exists to structure.

There is a particular version of this that deserves its own warning. Where the buyer is a competitor, exclusivity hands a rival an extended, uninterrupted look inside your business, with your commercial information, your margins and your customer list in front of them, at a time when you cannot talk to anyone else. That specific risk, and how sellers stage what they disclose against it, is the subject of the guide on selling to a competitor.

Your role afterwards, and what the timetable is really for

Two more sections of a typical heads of terms decide more than they look like they do: what the owner does after completion, and when everything is meant to happen.

The handover. Almost every buyer of an owner-managed business wants the owner to stay for a period, because the thing they are buying frequently walks around on two legs. The heads of terms usually records the shape of that: how long, in what capacity, on what terms, and whether it is paid. Each of those is a money question dressed as a logistics question.

• Length. A three-month handover and a two-year employment are completely different propositions. If you are selling because you want your life back, a two-year commitment may cost you more than the price difference between two offers is worth.
• Paid or unpaid. A twelve-month handover at no salary is, in plain arithmetic, a reduction in the price equal to a year of your market rate. If that is what you would have earned — say £65,000 — then an offer requiring it is £65,000 lower than an equivalent offer that does not.
• What authority you keep. This matters enormously if any part of your price is an earn-out. Being responsible for hitting a target while no longer controlling the budget, the pricing or the hiring is the standard way an earn-out quietly becomes worth nothing.
• What you agree not to do afterwards. Heads of terms commonly flag a period during which the seller agrees not to compete, not to approach former customers, and not to recruit former staff. Commercially, this decides what your next chapter can be, and it is one of the clearest examples of something to put in front of your solicitor before you agree to it in principle rather than after.

The timetable. A heads of terms normally names target dates: when diligence starts, how long it runs, when the parties aim to exchange and complete. Sellers tend to read this as administration. It is not. It is the only pressure in the document that runs in your favour, and it is the natural counterweight to exclusivity.

Consider what slippage costs. A deal that was going to complete in March and completes in July means four additional months in which you are running a business you have mentally sold, four additional months of staff sensing something, four additional months of adviser time, and one more set of management accounts for the buyer to examine — which, if trading has softened, becomes a reason to revisit the price. Delay is not neutral. It systematically favours whichever party is not paying the cost of it, and in a business sale that is rarely the seller.

So the timetable is worth treating as a term rather than a formality: dates that mean something, a diligence window with an end rather than an open door, and an understanding of what happens if the buyer does not move. Tying the exclusivity period to the timetable, so that a buyer who lets the dates slip does not automatically keep their exclusivity for free, is exactly the sort of structural point to ask your solicitor about.

A final item that belongs in this section because it is so often forgotten: costs. Who pays for what if the deal does not complete. Most sellers assume each side carries its own and are right, but the assumption is worth turning into something explicit, because an aborted deal after four months of diligence leaves a bill that arrives whether or not there was ever a sale.

Subject to contract does not mean harmless

The phrase at the top of the document, and the reassurance that usually accompanies it, is where sellers relax. It is described as non-binding, it says subject to contract, and the implication a seller takes away is that none of it really counts until the real contract is signed.

What the legal position is depends on how the document is written and on the law that applies to it, and that question belongs to your solicitor, not to this page. But there is a commercial reality that is independent of the legal one, and it is the reason this document deserves more care than almost anything else in the sale.

The anchor is set. Once a number is written down and both sides have said yes to it, it stops being one opinion among several and becomes the reference point. Every later conversation is conducted as a movement away from it. And the movement is almost always in one direction, because the buyer acquires new information during diligence and the seller does not. Diligence generates reasons to pay less. It does not, as a rule, generate reasons to pay more.

Reopening a settled point is read as bad faith. This is the part that surprises people. If, in week eight, a seller looks properly at the working capital definition for the first time and says it needs to change, the buyer does not hear a clarification. They hear a seller moving the goalposts. The conversation acquires an edge, trust degrades, and the buyer — who has now spent real money — becomes more inclined to look hard at everything else. Whatever the document does or does not oblige anyone to do, the practical position is that things written into a heads of terms are extremely difficult to improve later and comparatively easy to lose. It is a one-way ratchet with your name on it.

Silence is a concession too. A heads of terms that omits a point does not leave that point open in a neutral way. It leaves it to be settled later, during diligence, by the side with more information and more leverage. “To be agreed” on the debt list, the working capital definition, the earn-out measurement or the retention release is not a deferral. It is a transfer.

Which produces a short and unglamorous set of conclusions:

• Never agree a headline price separately from its structure. Cash at completion, deferred amounts and dates, earn-out size and how it is measured, retention size and release — these are the price. The headline is a label.
• Treat the definitions as price terms. What counts as debt, and where normal working capital is set, are worth six figures on a deal of this size, as the arithmetic above shows.
• Price the exclusivity before you grant it. Work out what a plausible chip divided by the weeks you are being asked for actually comes to, and negotiate the length with that figure in front of you.
• Do your own diligence first. Every issue you find and fix before a buyer is a repricing argument that never happens.
• Get the solicitor in before you sign, not after. The document that is “only non-binding” is the document that decides your deal. Reviewing it costs a fraction of what conceding a definition costs.

If you take one thing from this page, make it the reframe: a heads of terms is not the summary of a negotiation that has finished. It is the negotiation. By the time it is signed, the price range, the risk split and your leverage are all set, and everything that follows is the working out. Arrive at it having valued the business yourself, having understood what each line is deciding in money, and with a solicitor engaged to do the part that is theirs to do.

Arithmetic and general information only — not financial, tax, legal or investment advice. Your own figures, and your own accountant, decide what any of this means for you.

Frequently asked questions

What is a heads of terms in a business sale?

A heads of terms is a short document, usually two to six pages, recording what a buyer and a seller have agreed in principle before the sale contract is drafted. It normally covers the price and how it is broken down, whether shares or assets are being bought, how cash and debt are treated, the working capital position, any exclusivity period, what the owner does after completion, and the timetable. It goes by other names too, including heads of agreement, letter of intent, memorandum of understanding and term sheet.

Is a heads of terms binding?

That is a legal question and the answer depends on how the particular document is written and on the law that applies to it, so it is one for your own solicitor rather than for a general guide. What can be said commercially is that being described as non-binding does not make it harmless. Every figure in it becomes the reference point the rest of the deal moves away from, that movement almost always runs downward because due diligence generates reasons to pay less, and a seller who tries to reopen a settled point later is usually treated as acting in bad faith.

Where can I get a heads of terms template?

Not from this page, and the honest answer is that a general template is the wrong thing to be looking for. The wording of a heads of terms has real consequences, those consequences depend on your business, your circumstances and the specific buyer, and the document should be drafted and reviewed by your own solicitor. What is worth doing before that meeting is understanding what you are negotiating: that the headline price means very little until it is split into cash at completion, deferred amounts, earn-out and retention; that what counts as debt and where normal working capital is set are price terms in disguise; and that the exclusivity period is the largest thing you give away. Walk in knowing those and the solicitor time is spent on the drafting rather than on the education.

What is the most expensive mistake a seller makes in a heads of terms?

Agreeing a headline price without agreeing the structure that sits underneath it. Two offers with the same headline can differ by hundreds of thousands of pounds in the cash that actually arrives on the day of completion, depending on how much is deferred, how much sits in an earn-out and how much is held back as a retention. Once the headline is written down it becomes a ceiling, and every later conversation is about moving below it, so the split has to be settled in the same conversation as the number.

What does exclusivity cost a seller in a business sale?

Exclusivity means agreeing not to talk to any other buyer while the chosen one runs their due diligence, which removes the competitive tension that was holding the price up. Diligence on any owner-managed business finds something, and when it does the buyer can ask for a reduction knowing there is no longer an alternative in the room. A useful way to weigh the concession is to divide a plausible reduction by the number of weeks you are being asked to grant, which turns an abstract request into a figure per week. Shorter periods, a clear start trigger and a timetable the buyer has to keep to are the usual commercial answers.

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