What buyers should check before signing Heads of Terms

Heads of Terms are often treated as a formality, a quick document agreed in principle before the “real” legal work begins. For buyers, that assumption can be risky.

While Heads of Terms are not the final contract, they quietly shape the direction of the transaction. They influence negotiation leverage, set expectations on both sides, and affect how smoothly the deal progresses. Before signing, buyers should take the time to understand not just what they are agreeing to, but what it may mean later in the process.

What are Heads of Terms?

Heads of Terms set out the commercial framework of a deal, summarising the key points agreed between buyer and seller before detailed due diligence and legal documentation begins. They act as a statement of agreed principles, a guide for the negotiations that follow, and a reference point for advisers on both sides.

They are not the final contract. Most provisions are non-binding, but some clauses – particularly those dealing with exclusivity, confidentiality, and costs can have legal effect. Even where provisions are technically non-binding, they still matter. Once agreed, they shape expectations and influence what is seen as “reasonable” as the transaction develops.

Price is only one part of the deal

Buyers often focus heavily on the headline price. While important, price alone rarely tells the full story.

Before signing Heads of Terms, buyers should be clear on whether any part of the consideration is deferred, whether earn-outs are proposed and on what basis, and whether price adjustments may apply at completion. These elements can materially affect both the final amount paid and the overall risk profile of the deal. A clear understanding at this stage helps avoid pressure later, when changes become more difficult to negotiate.

Deal structure: Share purchase or Asset purchase

One of the most significant points in Heads of Terms is the proposed deal structure. A share purchase involves acquiring the company itself, along with its assets and liabilities, whereas an asset purchase allows the buyer to acquire specific assets, often with greater control over what is taken on.

This choice affects legal and financial risk, tax treatment, and the complexity of the transaction. While the structure can sometimes change later, doing so often introduces delay and friction. Buyers should be comfortable with the proposed approach before signing.

Exclusivity: Understanding the commitment

Exclusivity provisions are commonly included in Heads of Terms and can be legally binding. During an exclusivity period, the seller agrees not to negotiate with other parties, while the buyer commits time, cost, and focus to the transaction.

It is important for buyers to understand how long exclusivity lasts, whether the period aligns with a realistic timetable, and whether there is scope for extension if required. Exclusivity without a clear plan can create unnecessary pressure.

Conditions and assumptions

Heads of Terms often rely on assumptions that are not always spelled out. Buyers should consider whether the document properly reflects matters such as financing requirements, satisfactory due diligence, third-party consents, and internal approvals.

If these assumptions are left implicit, buyers may lose leverage later if circumstances change. Clear drafting at this stage helps preserve flexibility.

Timing and momentum

Indicative timetables are common in Heads of Terms, but they need to be realistic. Unachievable deadlines can increase pressure during due diligence, limit time for informed decision-making, and create tension between the parties.

A well-judged timetable supports momentum without forcing rushed decisions.

Costs and responsibility

Cost allocation is often overlooked at this stage. Buyers should understand who bears professional costs, whether any abort costs apply, and what happens if the transaction does not proceed. Addressing this early helps avoid misunderstandings later.

Common misconceptions buyers have

Certain assumptions frequently cause problems, such as believing that nothing in Heads of Terms matters because it is non-binding, assuming issues can be dealt with later, or treating legal documentation as an administrative step that follows due diligence. In practice, Heads of Terms often define the commercial boundaries of the deal long before contracts are signed.

Why early legal input helps buyers

Legal review at the Heads of Terms stage is not about slowing the process down. It helps buyers understand risk early, preserve negotiation leverage, and avoid unnecessary pressure later in the transaction. Senior legal input at this point can make the later stages of the deal more efficient and less contentious.

Final thoughts

Heads of Terms do not need to resolve every detail, but they do need to be properly understood. Taking the time to review them carefully before signing can prevent confusion, protect leverage, and set the transaction on a more structured footing. For buyers, clarity at this stage often makes the difference between a controlled process and a stressful one.