Once a suitable buyer for the business has been identified, we would always recommend seeking to agree heads of terms or a less formal term sheet listing out the key points, unless the economics of the transaction dictate otherwise. Not only do they help to focus the parties’ negotiations, they can also flush out any “dealbreakers” early on in the process, avoiding lengthy and expensive negotiations for a deal that isn’t going to happen.
Heads of terms (or letter of intent, heads of agreement, or memorandum of understanding as they are also referred to) set out the key commercial terms of the sale. As a seller, you will want to ensure that confidentiality requirements are also included (if not already covered by an NDA) and set out any timing requirements.
The buyer may look for an exclusivity agreement (or lock-out agreement) to be included. This would mean that the seller would not be able to solicit any offers from third parties or negotiate with anyone other than the buyer for a set period of time. If possible, this should be linked to certain milestones to ensure the buyer is progressing the transaction, for example granting a shorter initial exclusivity period, with an extension if the sale agreement is in circulation and the due diligence is materially complete. This will prevent the deal stagnating until the end of the exclusivity period is looming. In our experience long exclusivity periods lead to unwarranted delays.
It is also important that the balance between the cost and time involved in preparing the heads of terms and the desired outcome is carefully managed – there is always a danger that the heads of terms become overcomplicated and lose their usefulness.
We recommend that a seller should understand how a transaction is to be financed by a buyer, especially if there are competing offers. A fully financed transaction (eg funded by the bank or a venture capital trust) will undoubtedly take a significantly longer period of time to complete and require the buyer to undertake a more rigorous due diligence exercise.
See also our Tips for an Effective Set of Heads of Terms.
