What are Heads of Terms?
- kamfaulkner
- Oct 2
- 3 min read
When you’re buying or selling a business, one of the first documents you’ll come across is the Heads of Terms; sometimes called a “letter of intent” or “memorandum of understanding”, and often abbreviated to 'HoTs'.
But what exactly are Heads of Terms? Do you really need them when selling your business? And how do they affect the deal that follows?
This explainer walks you through the essentials in plain English.
What are Heads of Terms?
Heads of Terms are a short, written document that records the key commercial points agreed “in principle” between a buyer and a seller at the start of a deal.
Think of them as a roadmap: they set out what each side understands to be the basis of the transaction, without yet drafting the full legal contract.
Key points usually covered include:
What is being sold (shares in a company or the assets of a business).
The price (and how it will be paid).
Any assumptions the price is based on (for example, that the business is “cash free, debt free”).
Conditions before the deal can complete (such as due diligence or regulatory approvals).
Timetable and next steps.
Confidentiality and exclusivity provisions (so the seller doesn’t negotiate with others while talks are ongoing).
Are Heads of Terms legally binding?
In most UK business sales, heads of terms are stated to be “subject to contract” and not legally binding.
That means neither party is locked into completing the deal just because they signed the Heads of Terms. However, certain provisions, usually confidentiality, exclusivity, and costs, can be made legally binding if written that way.
Even when non-binding, Heads of Terms still carry weight:
They create a strong moral commitment, making it harder for a party to backtrack without damaging trust.
Courts may look at them if there is a later dispute about what was agreed.
Why use Heads of Terms?
For many owners, the big question is: should I have heads of terms when selling my business?
What do Heads of Terms look like?
There’s no single template, but most follow a simple letter-style format. Typical sections include:
Example scenario
Imagine you run a family engineering firm, and a buyer makes an offer.
Without Heads of Terms: you go straight to lawyers to draft the sale contract. During the negotiations, you discover the buyer assumed you’d stay for three years on an earn-out, while you expected to exit immediately. This leads to higher costs than if this issue had been dealt with early in the process.
With Heads of Terms: you write down the deal points early; price, payment on completion, no earn-out, six months’ consultancy handover, etc. Both sides are aligned before investing in legal work.
Heads of Terms in share vs asset sales
Share sale: the buyer acquires all the shares in the company. Heads of Terms will set out the price, any price adjustment (completion accounts or “locked box”), and seller warranties.
Asset sale: the buyer acquires specific assets (goodwill, contracts, property). Heads of Terms must list what is included/excluded, and address employees under TUPE.
To read more about Share sales and Asset sales see Share Sale vs Asset Sale: A practical guide for SME buyers and sellers
Should you always use Heads of Terms?
Not always. For simple, straightforward, deals (i.e., low value, all paid at completion) it might be quicker to skip heads and go straight to the main contract.
But for most SME sales, especially where:
there are multiple shareholders,
external funders or lenders are involved, or
the deal is complex (earn-outs, property transfers, cross-border issues),
…Heads of Terms are a sensible step to avoid misunderstandings.
Key takeaways
Heads of Terms are a deal roadmap, not the final contract.
They help clarify expectations, secure exclusivity, and guide advisers.
Usually non-binding, but can include some binding clauses.
Useful for complex sales, but may add unnecessary delay in very simple deals.
Next steps
If you’re thinking about selling or buying a business, the decision on whether to use Heads of Terms will depend on your circumstances, the complexity of the deal, and your appetite for risk.
Talking it through with a legal adviser early can save time, stress, and money later.
To discuss your situation, contact us at 📩 info@orbitlegal.co.uk | 📞 0115 6777095 |
Disclaimer
This content is for general information only and doesn’t constitute legal, accounting, financial, or tax advice. It’s based on the law of England & Wales and was correct at the date of publication, but the law and guidance can change. Reading this page doesn’t create a solicitor–client relationship with Orbit Legal. Please take advice on your specific circumstances before acting. Get advice for your situation by contacting Orbit Legal at info@orbitlegal.co.uk or 0115 6777095.
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