Heads of terms is the document that records what two parties have agreed in principle before the lawyers get involved in drafting the full contract. It sets out the price, the structure and the key commercial points of a deal, whether that is a business sale, a joint venture or an investment, and gives both sides something concrete to work from before legal costs increase. This guide covers what heads of terms usually include, whether they are legally binding, and what to check before signing one.
What is a Heads of Terms Agreement?
Heads of terms is a short, high level document recording the main commercial terms agreed in principle. You will also see the same idea called a term sheet, a letter of intent or a memorandum of understanding, the label matters far less than what the document says. It is used across a wide range of transactions:
- Buying or selling a business, whether by share sale or asset sale.
- Taking on a commercial lease.
- Setting up a joint venture or strategic partnership.
- Raising investment, where it may be called a term sheet.
- Franchise, distribution or major supply arrangements.
Are Heads of Terms Legally Binding?
Usually not, for the core commercial terms. Most heads of terms are expressly stated to be subject to contract and non binding, which lets both sides continue negotiating and carry out due diligence without being locked into the deal. That said, specific clauses are routinely drafted to bind the parties from the moment of signing, regardless of whether the deal itself goes ahead:
- Confidentiality: protecting information shared during negotiations.
- Exclusivity, sometimes called a no shop clause: stopping the other side negotiating with anyone else for a set period.
- Costs: setting out who pays legal or advisory fees if the deal falls through.
- Governing law and jurisdiction: which framework applies to any dispute over the binding provisions.
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Contact us now for more information on how our Mergers & Acquisition solicitors at MAR Legal can help you draft, review or negotiate heads of terms, or book a consultation to find out more about how we can help before you sign.
What Should Heads of Terms Include?
A well drafted set of heads of terms is usually two to six pages, and covers the same core ground regardless of deal type:
- Parties and purpose: who is involved, and a brief description of the deal.
- Price and payment: the headline price or pricing formula, deposits, and any deferred or earn-out elements.
- Structure and scope: whether it is a share sale or asset sale, and exactly what is included or excluded.
- Conditions precedent: due diligence, third party consents, or approvals that must happen before completion.
- Timetable: target dates for drafting, signing and completion, and any exclusivity period.
- Risk allocation: an outline of the warranties and indemnities to be given, and any liabilities staying with the seller.
- People and transition: key employees transferring, handover support, and any restrictive covenants on the seller.
From Heads of Terms to a Final Contract
Once heads of terms are signed, the deal moves into due diligence and drafting of the full agreement. Whoever drafts first, usually the buyer’s side on a business sale, will build the first draft from what the heads already say, plus standard legal protections, often with input from commercial contract drafting advice. Both sides then negotiate the detail, and if anything, material changes, the heads themselves may need updating for consistency before signing and completion. This is also the stage where post-completion tasks get missed if nobody owns them, updating statutory registers, filing at Companies House, or diarising obligations that continue after the deal closes.
Common Mistakes to Avoid
A few recurring issues cause more trouble than the size of the document might suggest (see our business acquisition checklist for the wider list of pitfalls to watch for):
- Vague wording like ‘reasonable adjustment’ or ‘fair limitations’ that creates room for disagreement once lawyers start drafting from it.
- Heads of terms that conflict with, or simply duplicate, an existing non-disclosure agreement already in place.
- Leaving too many points as ‘to be agreed’, which defeats the purpose of agreeing heads in the first place.
- Open-ended exclusivity with no time limit, which removes the other side’s incentive to move quickly.
How MAR Legal Can Help
If you have received heads of terms, or you are preparing to issue them, MAR Legal’s business sale solicitors can review the document and flag anything that binds you before you sign.