The Heads of Terms is the document that records, in two-sided agreement, what you and the buyer think the deal looks like. It is not the contract. The contract is the SPA, drafted afterwards, and the SPA is what you sign at completion. The Heads of Terms is a working summary, mostly non-binding, that sets the negotiating frame for the SPA. Two parts of it are binding: the confidentiality undertaking and the exclusivity period. Everything else can move between Heads of Terms and SPA, although in practice the headline price and the broad structure rarely do.
Read this clause-by-clause walk-through before you receive a Heads of Terms from any buyer. Mark up the buyer's draft against it. Take the marked-up version to your solicitor.
Contents
- What a Heads of Terms is, and is not
- Parties and recitals
- Deal structure
- Purchase price and adjustment mechanics
- Retention test
- Employment commitments and TUPE
- Client-introduction process
- Transitional services period and fee
- Exclusivity period
- Confidentiality
- Conditions precedent
- Completion mechanics and timing
- Governing law and dispute resolution
- What becomes binding when
- What to do today
What a Heads of Terms is, and is not
The Heads of Terms (sometimes called Letter of Intent, Memorandum of Understanding, or simply HoT) is a one-to-five-page document signed by both parties before due diligence and SPA drafting begin. Its job is to record the commercial agreement in enough detail that the SPA can be drafted without revisiting the basic terms, and to commit both sides to the negotiation period that follows.
It is not a contract for the sale itself. With two narrow exceptions, neither side is bound to complete the deal at the price and structure stated in the Heads of Terms. The exceptions are confidentiality (binding from signing) and exclusivity (binding for the stated period). Both sides know this; in practice, however, walking away from a signed Heads of Terms without good reason is reputationally costly and rarely happens absent a material change of circumstances.
Sign it carefully. The headline numbers and the structural shape of the deal are set here, and although they can move in the SPA, moving them is friction the buyer or seller has to justify. Whatever you sign at this stage tends to be roughly the deal you complete.
Parties and recitals
The opening section names the buyer and the seller, identifies the practice being sold, and sets out one or two sentences of context (often called recitals or "whereas" clauses).
What it does in plain English. Confirms who is buying and selling. If you are a partnership or sole practice, names you personally. If you are an incorporated practice, names the limited company and may also name you as the controlling shareholder. The buyer is named with their full legal entity name, registered office, and company number.
Normal language. The buyer is the actual operating firm, not a special-purpose vehicle. The seller is fully named with all relevant titles. The recitals state, in two or three sentences, that the seller wishes to sell and the buyer wishes to buy, and refer to the existence of an NDA already in place.
Unusual language. The buyer is a newly-formed SPV with no trading history and no relationship to the firm whose name has been on the conversation so far. Recitals that include extensive promises or representations rather than narrative context (recitals are conventionally non-promissory).
What to push back on. An SPV buyer with no parent guarantee. If the buyer wants to acquire through a vehicle, the parent firm should provide a guarantee in the SPA. Raise this at HoT stage.
Buyer-favourable version. Buyer is an SPV, no parent guarantee mentioned. Seller-favourable version. Buyer is the operating firm, signed by its principal personally as well as on behalf of the firm.
Deal structure
Sets out whether the deal is a share sale (acquiring the company that owns the practice) or an asset sale (acquiring the goodwill, WIP, fixed assets, and contracts). Sometimes also called "form of sale".
What it does in plain English. Defines what is changing hands. Share sales are simpler mechanically (one transaction, transfer of shares) but have different tax effects. Asset sales are more granular (each transferring asset listed) and trigger TUPE for staff.
Normal language. A clear statement that the deal is one or the other, with a list of what is included and excluded. For an asset sale, a list of the asset categories: goodwill, WIP, the client list, fixed assets, contracts, intellectual property. Cash, debtors, and creditors are usually retained by the seller in an asset sale.
Unusual language. An asset sale that includes the cash and debtors at face value (the buyer is acquiring those without applying any quality discount, which is unusual). A share sale that excludes specific liabilities by listing them out (those liabilities effectively stay with the seller, requiring a reverse indemnity).
What to push back on. Anything that bundles assets you intended to retain (your office freehold, for example) into the deal. Anything that requires you to take on liabilities you had not previously discussed.
Buyer-favourable version. Asset sale with the buyer cherry-picking assets and leaving liabilities with the seller. Seller-favourable version. Share sale that transfers the whole entity including its liabilities, with appropriate warranties to give the buyer comfort.
Purchase price and adjustment mechanics
The headline price, the payment schedule, and any post-completion adjustments.
What it does in plain English. Sets the total consideration, breaks it into the upfront cash component (typically 50 per cent on completion) and the deferred components (typically 25 per cent at month 12 and 25 per cent at month 24), and defines any adjustments that change the price between signing and completion.
Normal language. A fixed total consideration, paid 50 per cent on completion and 25 per cent at each of the first and second anniversaries. Adjustments may include working-capital adjustments at completion (a true-up against a normal level), and an apportionment of any client billing falling either side of completion. A statement that deferred amounts accrue interest at a defined rate, or do not, depending on what the parties have agreed.
Unusual language. A price expressed as a multiple of post-completion fees, with the multiple applied to actual rather than acquired fees. This shifts the buyer's downside risk onto the seller and makes the price intrinsically uncertain. A price contingent on the seller continuing to provide services beyond completion (which makes part of the price look like remuneration, which has tax consequences).
What to push back on. Open-ended adjustment mechanics. Adjustments should be defined to a number, with a methodology that produces a number, not "to be agreed in good faith".
Buyer-favourable version. Heavy back-loading (e.g. 30 per cent on completion, 35 per cent at year 1, 35 per cent at year 2) with adjustments referencing actual fees. Seller-favourable version. Standard 50/25/25 with completion-only adjustment, deferred amounts unconditional unless retention test is missed.
Retention test
Ties the deferred payments to a measurable client-retention outcome.
What it does in plain English. If a defined percentage of the acquired client base is retained by the buyer at the test date, the deferred payments are paid in full. If not, they are reduced according to a defined formula.
Normal language. A single threshold (typically 80 to 90 per cent of acquired recurring fees), measured at a defined milestone (often the first anniversary, sometimes the second), with no clawback above the threshold and a pro-rata clawback below it. The denominator is the recurring portion of the acquired fee base, not total billings; one-off projects do not count for or against.
Unusual language. Multiple measurement dates with separate clawbacks at each. A retention test that defines "lost" to include any client whose fee dropped at all. A test where the threshold ratchets up year by year (so 80 per cent at year 1 and 90 per cent at year 2 trigger separate clawbacks).
What to push back on. Anything that compounds. The seller's exposure should be limited to the deferred consideration, no more. Anything that allows the buyer to reclaim more than the deferred amount through retention mechanics is unacceptable. A test that bites the cash-on-completion or any earlier deferred tranche, rather than only the final tranche, is also unusual and worth pushing back on.
Buyer-favourable version. 90 per cent threshold, multiple measurement dates, pro-rata clawback that scales steeply, test biting more than just the final tranche. Seller-favourable version. Single threshold at the latest measurement date in the deal (month 24 in a 50/25/25 structure), applied only against the final 25 per cent tranche, no clawback above the line, fully transparent calculation. The Jack Ross structure sits at the seller-favourable end of this range.
Employment commitments and TUPE
Buyer-side promises about staff continuity beyond what the law requires.
What it does in plain English. Records that staff transfer with the practice (under TUPE in an asset sale, or automatically in a share sale), and adds buyer-side commitments on top of TUPE.
Normal language. A 12-month no-redundancy commitment from completion. Salary parity protected for the same period. Pension scheme either continued or matched. A statement that role mapping will be done before completion in writing.
Unusual language. "Subject to operational review" qualifying the no-redundancy commitment (which means the commitment is conditional). TUPE-only treatment with no additional commitments. A right for the buyer to "harmonise" terms within twelve months (which usually means cutting them).
What to push back on. Any qualifier on the no-redundancy commitment. The commitment should be unconditional for the stated period.
Buyer-favourable version. TUPE only. Seller-favourable version. 12-month no-redundancy, salary parity, pension match, written role mapping pre-completion.
Client-introduction process
How clients are told and introduced to the buyer.
What it does in plain English. Sets out the choreography of telling clients about the sale: who tells them, in what order, with what materials, on what timeline.
Normal language. Top clients (by fee value or relationship importance) are introduced personally by the seller, in joint meetings with the buyer's principal, in the days around completion. The wider client base receives a jointly-signed letter the day after completion. The seller's name appears first on all client communications.
Unusual language. The buyer takes the lead on client introductions, with the seller in a supporting role. A "rebranding programme" is run within the first three to six months. Clients are asked to re-sign engagement letters with the buyer's branding within a defined period.
What to push back on. Anything that puts the buyer's name first or that reduces your role in the client conversations to ceremonial. The retention test depends on these meetings going well, and they go well when you are visibly leading them.
Buyer-favourable version. Buyer-led, fast rebrand. Seller-favourable version. Seller-led for top clients, joint letter for wider base, no forced re-engagement.
Transitional services period and fee
Defines the post-completion handover work the seller does for the buyer.
What it does in plain English. Records the duration, intensity, and (where relevant) the fee for the seller's involvement in the transition.
Normal language. Twelve weeks at three days a week tapering to one. Activities listed (joint client meetings, operational handover, payroll-and-supplier introductions, answering historical questions). No additional fee, the seller's involvement during the TSA period being included in the headline consideration. Beyond month three, informal availability only.
Unusual language. A TSA stretching to six or twelve months at full intensity. An open-ended "as reasonably required" obligation. A TSA that is described as part of the consideration but with no fee, then extended in practice through informal pressure.
What to push back on. Any TSA longer than twelve weeks at full intensity should come with a separate consultancy fee. Open-ended obligations should be replaced with a defined day-count.
Buyer-favourable version. 26-week TSA, full availability, no separate fee. Seller-favourable version. 12-week tapered TSA, defined day-count, separate consultancy contract for anything beyond month three.
Exclusivity period
The binding part of the Heads of Terms that prevents the seller from speaking to other buyers during the negotiation.
What it does in plain English. Commits the seller to negotiate exclusively with this buyer for a defined period, typically 30 to 90 days. The seller may not solicit, accept, or further engage with any other buyer during this time. The buyer typically has no equivalent restriction.
Normal language. 60 days exclusivity from signing of HoT, terminating earlier if either party formally withdraws. A "break clause" allowing either party to terminate exclusivity if defined milestones are missed (heads of terms not progressed to SPA draft within 30 days, for example).
Unusual language. Exclusivity periods longer than 90 days. Automatic extension of exclusivity if due diligence is not complete by a certain date. Exclusivity with no termination right for the seller even if the buyer is delaying.
What to push back on. Long exclusivity without milestone protection. The seller's bargaining position weakens sharply during exclusivity; long exclusivity periods favour buyers who want to chip the price.
Buyer-favourable version. 90 days, no break clause, automatic extension for diligence. Seller-favourable version. 60 days, break clause if HoT-to-SPA-draft milestone is missed, no automatic extension.
Confidentiality
The other binding part of the Heads of Terms.
What it does in plain English. Confirms that information shared between the parties remains confidential. Usually references and reinforces the mutual NDA already in place from before the first meeting.
Normal language. A short clause confirming the NDA continues to apply, with the same survival period (typically two to three years post-discussion).
Unusual language. A confidentiality clause that overrides the existing NDA with weaker terms (rare, but possible if the buyer's solicitor is using a generic template). One-sided confidentiality (only the seller is bound).
What to push back on. Any narrowing of the existing NDA terms.
Conditions precedent
Things that have to happen before the deal can complete.
What it does in plain English. Lists external dependencies, satisfactory due diligence, lender consents if any, regulatory clearances if any, key-staff retention agreements signed.
Normal language. Satisfactory due diligence, completion of the SPA, exchange of formal documents, settlement of any pre-completion adjustments. Each condition with a defined longstop date.
Unusual language. A long list of vague conditions ("satisfactory completion of integration planning", "agreement of post-completion governance"). Each vague condition is a renegotiation point.
What to push back on. Vague conditions. Each condition should be specific enough that you can tell, on the morning of completion, whether it has been satisfied or not.
Completion mechanics and timing
How and when the deal closes.
What it does in plain English. Names the target completion date, the location of the closing, and the key documents to be exchanged.
Normal language. A target completion date 30 to 60 days after HoT signing, on a working day, with funds sent by CHAPS to the seller's solicitor against simultaneous delivery of executed documents. A defined cut-off time and a defined remedy for non-receipt.
Unusual language. A "rolling" completion date that floats according to events. Completion conditional on post-completion verification that releases funds in stages.
What to push back on. Anything that softens the binary nature of completion. Funds either arrive on the day or they do not.
Governing law and dispute resolution
Which legal system the contract operates under and how disputes are resolved.
What it does in plain English. Names England and Wales (almost universal for UK practice deals) as the governing law, and either the English courts or arbitration as the forum for disputes.
Normal language. English law, English courts, with an option for both parties to refer specific issues to a single arbitrator if they prefer (rarely invoked in practice).
Unusual language. Foreign governing law (only relevant if the buyer is based outside the UK and is unusual). Mandatory arbitration in a remote venue.
What becomes binding when
To recap the binding/non-binding distinction:
- Binding from signing of Heads of Terms.
- Confidentiality. Exclusivity. Each party's obligation to negotiate in good faith for the exclusivity period (a soft obligation, but real). The cost-allocation provisions if any are stated.
- Non-binding at HoT.
- Headline price. Deal structure. Retention test mechanics. Employment commitments. Client-introduction process. TSA. Conditions precedent. Completion timing. Everything else.
- Becomes binding at SPA signing.
- Everything in the SPA, which is most of the above, restated in fuller and more precise contractual language. The SPA is the binding contract; the HoT is the working agreement that informs it.
- What changes between HoT and SPA in practice.
- Wording is tightened, definitions are added, the schedules are populated with the actual lists of clients, staff, assets, and disclosures. The headline numbers and the broad shape of the deal rarely change without good reason; specific clauses are negotiated in detail.
What to do today
If a Heads of Terms is sitting on your desk waiting to be signed, three things are worth doing before you sign:
- Mark up the buyer's draft against this guide. For each section, note whether the language is normal, unusual, or worth pushing back on. Your solicitor will value the marked-up version more than the clean draft.
- Confirm the binding/non-binding split is clear in the document. A well-drafted HoT explicitly says which clauses are binding and which are not. If the language is ambiguous, get it clarified before signing.
- Confirm the exclusivity period and the break clause. 60 days with a break clause is normal. Anything beyond 90 days, or no break clause at all, is worth questioning.
The Heads of Terms is the moment in the negotiation when the seller's hand is at its strongest. Once it is signed and exclusivity has started, the balance shifts. Whatever you want to negotiate, negotiate now.
Related reading
- Ten questions to ask any buyer before exclusivity the screening test to run before you sign exclusivity.
- Briefing your solicitor the clauses to focus on once the SPA is being drafted.
- Tax questions to take to your adviser the structural tax decisions that need to be made before the HoT is signed.
- A clean structure, not a leveraged earn-out the 50/25/25 mechanics with worked examples.