Heads of terms for a business sale

Heads of terms are where the deal is actually made. By the time the sale agreement is drafted the commercial position is fixed and the lawyers are documenting it rather than shaping it, which is why the hour spent on the term sheet is worth more than the week spent on the long form. Advice sought after heads are signed can describe the position. Advice available while they are being agreed can change it.

Two structures, taxed very differently

Clause 1 offers a share sale of the entire issued share capital, or a sale of the business and assets. Keep one and work through the document deleting the wording that belongs to the other. The choice is not presentational: it changes what the buyer inherits, what the seller pays in tax, and whether employees transfer automatically under TUPE. Sellers usually prefer a share sale, buyers often prefer assets, and the gap between the two is frequently the largest single number in the transaction. Take accountancy and tax advice on the structure before signing, because reopening it afterwards is close to impossible without losing goodwill.

Completion accounts or locked box

Clause 2 offers both. Completion accounts adjust the price after closing against accounts drawn up at completion. A locked box fixes the price by reference to a historic balance sheet, with the seller undertaking not to extract value after that date. Locked box gives certainty and suits a clean business with reliable accounts. Completion accounts suit a business where the working capital position moves about. Only one should survive into the signed document.

What is binding and what is not

Most of this document is deliberately not legally binding. Clauses 10 to 14 are, and are marked as such: exclusivity, confidentiality, costs and the operative core. Keep the "subject to contract" heading and the statement of status, and keep repeating "subject to contract" in the emails and letters passing between the parties until the sale agreement is signed. Correspondence that drops the label has a way of becoming an agreement nobody meant to make.

Exclusivity is the clause a seller gives away cheaply

A buyer will want a period in which the seller cannot talk to anyone else. That has real value and is worth pricing: a shorter period, or one conditional on the buyer meeting diligence milestones, keeps the seller's alternatives alive while the buyer does its work.

Our commercial solicitors work on heads of terms before the structure hardens, which is where the value sits, and coordinate with your accountant on the tax position.