What are heads of terms in a business sale?
Heads of terms is a document that records the key terms of an agreed deal before the formal sale contract is drafted. It is not usually legally binding in full, but it sets out the intent of both the buyer and seller and acts as the foundation for everything that follows.
If you have received an offer on your business and are moving into serious negotiations, one of your next steps will typically be heads of terms. This article explains what the document includes, what is and is not legally binding, and where it sits in the sale process.
When are heads of terms issued?
Heads of terms are issued once a buyer has submitted a serious offer and both parties have agreed the broad shape of the deal. At this point, the buyer — or their adviser — will typically draft the document to confirm the terms discussed.
It is worth noting that heads of terms are not a final contract. The purpose is to record where both parties stand before solicitors become involved and the legal process of transferring ownership begins.
What does a heads of terms document include?
- The contents will vary depending on the complexity of the deal, but most heads of terms documents will cover:
- The agreed or proposed sale price
- The names and details of all parties involved
- The structure of the deal — whether it is an asset sale or a share sale
- The intended completion date
- Any conditions that must be met before the sale can proceed
- Exclusivity arrangements (preventing the seller from negotiating with other buyers during a defined period)
- Confidentiality obligations
- Any earn-out arrangements or deferred payment terms, if applicable
What is and is not legally binding?
This is the point that causes the most confusion. Heads of terms are generally not legally binding as a whole — either party can withdraw from the deal at any point before contracts are exchanged. However, certain clauses within the document are typically binding from the moment they are agreed.
The table below sets out the legally binding and non-legally binding clauses.
| Element | Usually binding | Notes |
| Agreed sale price | No | Can change after due diligence |
| Exclusivity period | Yes | Prevents sellers from negotiating with others |
| Confidentiality clause | Yes | Protects sensitive information shared during sale |
| Earn-out arrangement | No | Indicative at this stage; finalised in the contract |
| Intended completion date | No | A target, not contractually binding |
Because some elements are binding and others are not, it is important to read the document carefully before signing it. If you are unsure about any clause, take legal advice before proceeding.
Where do heads of terms sit in the sale process?
Heads of terms come after an offer has been accepted in principle but before due diligence and legal work begin. In a typical business sale, the process looks like this:
- The agreed or proposed sale price
- The names and details of all parties involved
- The structure of the deal — whether it is an asset sale or a share sale
- The intended completion date
- Any conditions that must be met before the sale can proceed
- Exclusivity arrangements (preventing the seller from negotiating with other buyers during a defined period)
- Confidentiality obligations
- Any earn-out arrangements or deferred payment terms, if applicable
Heads of terms mark the transition from early-stage negotiations into the formal sale process. Once they are agreed, the buyer will typically commission their due diligence and instruct solicitors to begin drafting the legal documents.
What should sellers look out for?
Heads of terms can feel like a formality, but the terms you agree to at this stage can influence the final deal. A few things worth checking before you agree:
- Business is marketed and buyer interest is generated
- Buyer submits an offer following initial discussions
- Offer is accepted in principle and heads of terms are drafted
- Due diligence takes place — the buyer examines your financial records, contracts, and operations
- The sale and purchase agreement is drafted by solicitors
- Contracts are exchanged and the sale completes
- How can Selling My Business help
Reaching the heads of terms stage is a positive sign — it means a serious buyer is on the table. But the detail matters, and this is where having experienced advisers on your side can make a real difference.
At Selling My Business, our team has guided thousands of business owners through this process over more than 60 years. If you are at the stage of receiving or reviewing heads of terms, or if you are preparing your business for sale, contact a member of the Selling My Business team for a confidential conversation.
