Heads of Terms
1st Sep 2009
One of the first steps in many business transactions is to agree a document outlining the terms of the deal.
Heads of terms (also known as ‘heads’) can range from a couple of sheets of paper through to several pages, outlining the detail of funding, timing, costs and various other important matters.
Failure to agree heads can lead to a transaction stalling before it is off the ground and due consideration should be given to ensuring there is sufficient detail for both parties to understand the structure going forward.
The heads themselves are not binding, but their significance should not be underestimated.
It is often at this stage when disagreements arise and misunderstandings are highlighted.
Whilst it is never desirable to lose a deal, it is vital that both sides understand exactly what has been agreed before costs are incurred drafting further documentation.
The detail of funding arrangements and exactly what is being bought and sold can often throw up unexpected issues which need to be resolved.
Commonly there will also be clauses in the heads dealing with confidentiality and exclusivity, which can be stated as being enforceable and which ensure that both sides are adequately protected.
Confidentiality might be supplemented by a further, more detailed, confidentiality agreement.
This is particularly important where a purchase is subject to due diligence; if you are opening up your books to a possible competitor the confidentiality and security of that information is often of paramount concern.
Heads are, of course, a snapshot in time of the agreement reached. The actual structure of a transaction can, and does, change as more information is revealed and funding arrangements evolve.
They remain, however, an extremely persuasive tool. Any party wishing to deviate from the original documented agreement can find their position significantly weakened if there is resistance to a change.
Transactions can be, and are, concluded without heads ever being drafted. It is advisable however that they be prepared wherever possible.
The relative expense of their preparation can be low where everything is clearly agreed, and where the expense is higher because of negotiation it is better that issues are ironed out.
If any significant disagreements can be dealt with before detailed documentation is prepared this can save money in the long run and prevent a deal from failing at the final hurdle some weeks or months down the line.
* James Wharton is a solicitor in the business and company law team at BHP Law. For more information, contact him on (01325) 466794.
Author: James Wharton, Solicitor (JamesW@bhplaw.co.uk)
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