Selling your business – Heads of Terms and NDA

Once you have resolved to sell your business and decided on a structure that is going to suit you, the next stage is finding a prospective buyer and agreeing Heads of Terms. Taking your business to market can be a daunting process; especially as it is something many owners of private companies may only do once! But you are not alone in this process and the broker that has helped you construct the right valuation and deal for you can also assist in taking your company to market in a discreet and confidential manner.

Once you have found a buyer, the next thing you will need to agree are Heads of Terms.

What is the point of Heads of Terms?

Heads of Terms set out the principle terms of the deal that the parties are committing to negotiate. Generally speaking, they are ‘non-legally binding’ and should be drafted so that the majority of clauses (with a few exceptions) are subject to contract. Whilst it may seem unnecessary to negotiate an ‘agreement to agree’ the point of Heads of Terms is not to get into the devil of the detail for the transaction, but to outline the basic principles of the deal, timescales and responsibilities. After the Heads have been agreed, you then get into the due diligence stage of the transaction which will further influence what detail needs to be contained in the transaction documents themselves.

Why aren’t heads legally binding?

The majority of clauses in Heads of Terms aren’t legally binding as it allows:

1. The parties to incur substantive costs in the knowledge a deal has been agreed in principle
2. The parties to seek and further negotiate the terms of the deal when they have the benefit of responses to due diligence enquiries

What is in Heads of Terms?

As every deal structure is different, the provisions contained in the relevant Heads of Terms will vary. However, there are a few fundamental provisions that you would expect to find in Heads including:

1. a paragraph setting out the structure of the deal, the proposed purchase price and when this is due
2. an outline of the expectations in terms of due diligence enquiries
3. an outline of the expectations of the Purchase Agreement and who is going to prepare it
4. a legally binding confidentiality clause
5. a legally binding exclusivity clause
6. a legally binding costs and jurisdiction clause

What is an NDA

An ‘NDA’ or ‘Confidentiality Agreement’ is an agreement designed to protect both your information and the Company’s. It commonly involves:

1. an obligation to keep information secret; and
2. an obligation to only use information for a specific purpose.

This may be included within your Heads of Terms or you may have a standalone agreement. Either way, it is essential before proceeding that you have a comprehensive legally binding provision in place.

Who is involved?

Typically, the buyer’s solicitor would prepare the Heads of Terms for a transaction. That being said, your broker, agent or CF advisor may also commonly prepare Heads of Terms and certainly would be involved in considering and commenting on the purchase price, deal structure and how this is constructed.

If you have been presented with a set of Heads of Terms or need assistance navigating your sale, please don’t hesitate to Holly Threlfall or the team on 01604 828282 / 01908 660966 or email info@franklins-sols.co.uk

What next?

Once you have signed Heads of Terms, it’s time for the parties to move onto due diligence enquiries.