We see M&A Strategies at play every day with so many companies selling and merging together, but selling a complete company or merging with another one is not as simple as buying a car or another larger than average purchase. The action of bringing two businesses together as one or out right buying another company is a complicated matter for sure and going into one of these transactions with no knowledge of how it is done, can leave you confused, alone in business, and out of luck. One of the more confusing terms you will want to understand is called Heads of Terms and their overall intent.
What Are Heads of Terms
Essentially, heads of terms are a letter of intent sent from one company to another. The letter maintains letters of potential interest, initial terms of acquisition, and terms of transferring agreement. Heads of terms are not legalised documentation of one company purchasing another, but rather an initial statement regarding interest in an acquisition. The receiving party is, in no way, obligated to sell their business. It is merely an initial statement of intent with no legal ties to either party. Look at Heads of Terms as the jumping off point in which negotiations can begin.
Why are Heads of Terms Used?
Heads of Terms are used for a variety of different purposes and depending on you type of business, they may be required in acquisitions and specific transactions. Some of the more common uses of Heads of Terms include…
Written Confirmation in Main Terms Agreed for Principle
An Outline of Obligations and Timetable for Parties to Begin Negotiations
Framework for Preliminary Clauses That May Become Legally Binding
Example of Heads of Terms
Among the easiest examples of Heads of Terms to understand is in the case of a Landlord/Tenant relationship. The Heads of Terms for lease agreements initiates price to be paid for the lease, what the property may, or may not be used for, and it is a skeleton form of a lease agreement. As stated previously, the Heads of Terms are in no way binding at this point and are up for negotiation by both parties. In the case of rental agreements, it is a document given before the actual lease agreement is signed to explain the property and what the agreement entails to the potential renter.
Can There Be Legally Binding Entities in Heads of Terms
Yes, there can actually be legally binding entities in Heads of Terms agreements, but most people tend to avoid legalities at this point in an agreement. Heads of terms can be legally binding if they include specific criteria including, but not merely limited to…
Must Be in Writing
Include Items Previously Agreed Upon Between Both Parties
Have Been Signed by All Parties Involved
Include Initial Offer, Acceptance, Consideration, and a Full Intention to Enter Into a Legal Agreement
Once the Heads of Terms include all the above criteria and are signed by both parties, the agreement becomes a legally binding contract. Before signing a Heads of Terms agreement, one or both parties has the ability to amend, retract, and alter any aspect of the agreement without any legal ramifications. However, the Heads of Terms are still Subject to Contract in which a formal agreement with iron clad statements and intentions are placed for formalities on negotiations to begin.
Key Points to Remember When Negotiating Heads of Terms
Although specific criteria must be in place for a Heads of Terms agreement to be legally binding, there remains certain stipulations that can interfere with its overall legality. Here are some of the key points you should always remember when negotiating a Heads of Terms contracts between two parties.
Key Points – Heads of Terms acts as a structure of an agreement, but it must also contain a principle agreement on the actual transaction. Any contention issues before the Heads of Terms agreement is signed should be managed and outlined to maintain order and keep the transaction moving forward.
Sufficient Detail – Ideally, there should be sufficient detail including in a Heads of Terms agreement to ensure both parties have adequate negotiable terms. Lack of details can result in significant delays as all parties may not have enough information to make a credible decision in the matter.
Subject to Contract – This is a key phrase in any Heads of Terms agreement and it allows the negotiating parties to use an additional contract as the final, and legal document rather than the Heads of Terms. Should the Heads of Terms be regarded as the legal document in question, there is no need to include Subject to Contract within the agreement.
Legal Entities – Most Heads of Terms agreements can be drawn up by both independent parties, but in the case of title transfers between businesses or acquisitions, each party should entrust the Heads of Terms agreement to trusted legal entities. This reduces the risk of possible legal issues later when the final contract is signed.
In conclusion, Heads of Terms is merely a formality agreement in which the intent to purchase a business or property entity is put forth. It is not binding unless both parties agree, formally on making it a legally binding contract and is subject to certain negotiable details during the process. Heads of Terms can be used for a variety of acquisitions and mergers between companies and is merely the first step in a long process of merging one business to another or acquiring another entity outright. In the event you wish to go ahead with an agreement, any and all Heads of Terms and following agreement papers should be processed through lawyers on both sides of an agreement.
Platinum Business Growth are expert M&A & Corporate Fundraising Advisors. We are a partner of a US investment bank and have direct access to over 5,500 investors across the globe.
We would love have a chat to see how we can add value to your M&A or fundraising projects for lenders/investors or for borrowers/investees, please reach out to us here if you'd like to do.