Heads of terms arrive as a relief. After weeks of circling, somebody finally puts a number on paper, and it is usually a good number. The document says it is not legally binding, your solicitor has not been properly engaged yet, and the buyer would like it signed by Friday.
That is the moment the deal is actually decided, and most sellers do not know it.
Heads of terms go by several names — heads of agreement, letter of intent, memorandum of understanding, term sheet. Whatever it is called, the commercial content is normally expressed as subject to contract and non-binding. That is intentional and sensible: it lets both sides agree the shape of a deal without committing to it before diligence.
But the same document almost always contains clauses that are binding, and they are the ones with teeth:
So the price is not binding and the promise not to shop the deal is. A seller who reads only the heading at the top of page one has the position precisely backwards, and it is worth asking your solicitor to walk the document clause by clause and say plainly which paragraphs bind you.
Competitive tension is the only real leverage a seller has. It does not appear in any clause and it cannot be written down, but it is what makes a buyer round upwards rather than downwards. Exclusivity switches it off, by agreement, in writing.
Consider the position on either side of that signature. The day before, you have a buyer who knows there may be others, no committed professional fees, and the ability to walk. The day after, you have one buyer, a solicitor and an accountant already running up costs, a diary full of diligence requests, and no alternative you could revive quickly if this one collapses.
Buyers understand this asymmetry perfectly well. It is why price revisions cluster in weeks six to ten of an exclusivity period rather than in week one — not because that is when the findings arrive, but because that is when the pressure works. Our note on where the price gets chipped in due diligence covers the specific mechanisms.
One point of law worth knowing, because it cuts both ways. In Walford v Miles, decided by the House of Lords in 1992, the court held that an agreement to negotiate in good faith is too uncertain to be enforceable, while a lock-out agreement — a promise not to negotiate with third parties — can be enforceable where it is supported by consideration and runs for a specified period. The lock-out in that case failed because no duration had been stated. So an exclusivity clause with no end date may be worth very little; a clearly dated one is a genuine obligation on you.
Take an illustrative practice with £1.2m of recurring fees. The heads say the price is one times recurring fees, subject to due diligence, and little else. The seller reads £1.2m and assumes what everyone assumes: 60% cash at completion, so £720,000, with £480,000 deferred over two years.
Ten weeks of exclusivity later, the draft share purchase agreement says something different:
The headline has moved from £1.2m to £960,000 — £240,000, or 20% of the price. Cash on completion has moved from an assumed £720,000 to £480,000, which is another £240,000 that the seller was counting on receiving on the day and now will not.
Not one of those four changes required a bad diligence finding. Each of them exploited a silence in a document the seller thought was a good result.
The remedy is not legal muscle. It is specificity, added while you still have something the buyer wants.
Sellers treat exclusivity as a standard term to be accepted. It is not. Three things are properly negotiable.
The length. Shorter is better, and it should be tied to what the buyer genuinely needs to do rather than to a round number. Extensions can be granted later if diligence is progressing honestly — and refusing an extension is a real piece of leverage you only have if the original period was short.
The conditions. Exclusivity can be drafted to fall away if the buyer misses agreed milestones, fails to instruct advisers, or seeks to change the headline terms other than on the basis of something actually discovered in diligence. Buyers resist this and it is still worth asking, because the request itself tells you a good deal about how the next ten weeks will go.
What you are still allowed to do. Continuing to run the firm, taking on new clients, having conversations you had already started. Broadly drafted exclusivity can catch more than a seller expects.
Exclusivity is not unreasonable. A buyer about to spend real money on legal and financial diligence is entitled to know the seller will not use their offer to run an auction. The question is never whether to grant it, but what you get in exchange — and the answer should be precision, not goodwill.
A well-drafted heads of terms takes perhaps two extra weeks and one more round with your adviser. On the figures above it was worth £240,000 of headline and £240,000 of day-one cash. That is the best-paid fortnight in the whole transaction, and it happens before anybody has opened a data room.
If you are earlier than that in your thinking, our notes on preparing your firm for sale and how accountancy practices are valued cover the ground that comes first.
Mostly not, and deliberately so. The commercial terms — price, structure, timetable — are normally expressed as subject to contract and non-binding, which is why they can be marked up freely and why nobody instructs full legals until they are agreed. But a handful of clauses in the same document usually are binding, and they are the ones that matter: exclusivity, confidentiality, who bears costs, and governing law and jurisdiction. Sellers read the non-binding heading at the top and assume it covers the whole page. It does not. Ask your solicitor to tell you, clause by clause, which parts you are actually contractually bound by before you sign anything.
Exclusivity, sometimes called a lock-out, is a promise not to negotiate with anyone else for a defined period while the buyer completes due diligence. It matters because competitive tension is the only real leverage a seller has, and exclusivity switches it off by agreement. The day before you sign, you have alternatives and the buyer knows it. The day after, you have one buyer, a stack of professional fees already committed, and a diary full of diligence. Every re-trade of the price happens inside that window, and it happens then precisely because that is when it works.
It can, and the leading authority is Walford v Miles, decided by the House of Lords in 1992. The court held that an agreement to negotiate in good faith is too uncertain to be enforceable, but that a lock-out agreement — a promise not to negotiate with third parties — can be enforceable where it is supported by consideration and runs for a specified period. In Walford itself the lock-out failed for want of any stated duration. The practical lesson runs both ways: an open-ended exclusivity may be worth little to the buyer, and a clearly dated one is a real obligation on you.
Yes, because the price in the heads is usually non-binding, and that is the central risk of a thin document. A buyer is entitled to revisit terms in light of what diligence uncovers, and a genuine finding is a fair basis for doing so. The problem is the re-trade that rests on nothing new — a softer multiple, an adjustment mechanism never previously mentioned, a longer deferral. The defence is not legal, it is drafting: the more precisely the heads define the multiple, the measure it applies to, the completion split and the adjustment basis, the less room there is to move without an actual reason.
Five things, and they cost nothing to ask for. A defined end date rather than an open period. A stated multiple applied to a defined measure, so recurring fees means something specific. The completion and deferred split in pounds and in months, not in principle. The adjustment mechanism and whether it is capped. And confirmation of the buyer's funding position, because exclusivity granted to someone still raising the money is the worst version of this trade. If a buyer will not put those in writing before exclusivity, they are unlikely to become more accommodating once you have signed.
Sources: Walford v Miles [1992] 2 AC 128 (House of Lords) is the leading English authority on the enforceability of lock-out and lock-in agreements, holding that an agreement to negotiate in good faith is unenforceable for uncertainty while a lock-out for a specified period, supported by consideration, may be enforceable. The transaction figures in this article are illustrative and are not drawn from any particular deal.
This article is general information about how heads of terms and exclusivity operate on a professional-services transaction, not legal, tax or investment advice, and Founder Capital LLP is not authorised or regulated by the Financial Conduct Authority. Nothing here is an offer or invitation to invest; any investment opportunities we reference are available only to professional investors, certified high-net-worth individuals and self-certified sophisticated investors, are not open to retail investors, and capital is at risk and returns are not guaranteed. Please take specific advice from a qualified corporate solicitor and adviser before you sign anything.
