Heads of terms

In plain English

Once a buyer and seller have agreed the shape of a deal, they write it down. Heads of terms typically cover the price and how it is derived, the structure of the consideration (cash, deferred, earnout, equity), the pricing mechanism, the proposed timetable, conditions, the founders' future roles and any exclusivity. Most of the document is usually expressed to be non-binding, with exceptions such as exclusivity and confidentiality.

Why it matters

Heads of terms are more important than their non-binding status suggests. They set the expectations against which everything later is measured, and it is difficult to improve on them once exclusivity has been granted. Points left vague at this stage tend to be resolved in the buyer's favour later. Experienced advisors try to get the commercially important detail, including the enterprise-to-equity bridge and the earnout mechanics, settled here.

What to watch for

• Be specific about what is and is not binding.
• Record the pricing mechanism (locked box or completion accounts) and the treatment of cash, debt and working capital.
• Set out the earnout measure, targets and protections if there is one.
• Agree the timetable and what happens if it slips.

Transaction language and legal treatment depend on the agreement and the jurisdiction. Written by Motion Advisory Partners as general guidance, not legal advice.