Selling a Privately Owned Business – Briefing 13 – Heads of Agreement
Once you’ve successfully negotiated a deal with your preferred buyer, that final offer is usually confirmed in a “Heads of Agreement” document (sometimes also referred to as a “Heads of Terms”).
Here are ten key points to consider in relation to the Heads of Agreement:
1. The Heads is essentially a “layman’s” document, which has one overriding objective, which is to fully and accurately outline the deal that has been agreed, so that there are no misunderstandings. Both you as vendor and the buyer will sign to confirm agreement.
2. As it isn’t a legal document (though some clauses may be legally binding) it’s not usually necessary for lawyers to be involved, as their main focus will be on the subsequent legal contract for sale, the “Sale and Purchase Agreement”. Nevertheless the Heads is an important document which should be carefully prepared.
3. A key issue for you as vendor at this point is to ensure the completion timetable doesn’t slip, and this should be made clear in the Heads. At this stage your negotiating position is at its strongest as you will usually still have other interested parties, and even competing offers for your business, but these will inevitably begin to dissipate as time progresses.
4. Clearly the Heads must include all the essential elements of the offer that has been agreed. No material issues should be left for subsequent discussion, as this creates uncertainty and potential for subsequent renegotiation. All key aspects, and in particular arrangements for and timing of all payments should be clearly and unambiguously defined, if possible with specific dates rather than general references to future events.
5. On signing the Heads you as vendor will give a period of “exclusivity” to the buyer, during which both parties agree to commit exclusively to the deal and not to continue negotiations with anyone else. The length of the exclusivity period will vary depending on individual circumstances, but it should be as short as possible. Generally in the small business market, a period of six to eight weeks should be sufficient.
6. Controlling the timescale at this stage is also vital because the longer the transaction goes on, the greater the potential for unexpected external, or even internal circumstances to occur, which will be outside your control as vendor, and which may damage the agreed deal.
7. From the Heads stage onwards, material costs will start to be incurred by both parties, and it is therefore important that a detailed completion timetable is agreed, and set out clearly in the Heads.
8. As vendor it is desirable to include a clause in the Heads that if the buyer fails to meet key deadlines in that timetable, their exclusivity will lapse. If the buyer attempts to renegotiate a key element of the transaction, then exclusivity should also lapse as a matter of course, and this should be stated as a specific term in the Heads.
9. Always remember that once Heads are signed, the deal is not yet done. The period between Heads and ultimate completion can be one of the most difficult in the sale process. A whole new group of advisors become involved on both sides, some of whom will not have been party to original negotiations, with the resultant potential for delay.
10. Finally, as vendor it is also important that particularly during this crucial time you and your management team do not “take your eye off the ball” at the business because of involvement in the sale process.
During the period of exclusivity the buyer will need to undertake their “due diligence”. This in essence is an investigation of the business by the buyer to ensure that the assumptions underlying their offer are correct. This topic is covered in our next briefing.
26 November 2019