The phrases that corporate lawyers hear most often during initial conversations with clients are: “it is pretty straightforward” and “everything is agreed”. Unfortunately, it is not uncommon for this not to be the case at all! In the light of this, lawyers, accountants, business sales agents and corporate finance specialists will always recommend that “Heads of Terms” (or a “Term Sheet”) are prepared and agreed. Estate Agents commonly deal with property sales in a similar way, by circulating a “Memorandum of Sale”.
The main focus of Heads of Terms is to agree points of principle in writing, clarify any major issues and provide an aide memoire for the proposed transaction. The detail will follow in the documents that are to be drafted by and negotiated between the lawyers.
An important point to remember is that Heads of Terms are not intended to be legally binding. Parties will not usually want to go ‘back on their word’ or contradict a previously agreed written term, which can damage goodwill. However, it is common for issues to arise once due diligence has commenced and an unknown liability or risk arises. I always recommend that the document states on the face of it that it is not legally binding. If you intend the Heads to contain legally binding provisions, e.g. confidentiality, exclusivity, costs contributions or deposits, it is wise to seek legal advice at this stage.
This is a good opportunity to also consider the tax implications for the parties. Your accountant or tax adviser will be able to assist you with this. An experienced adviser may quickly discover an issue that the parties may not have previously considered.
Every deal is different and has its own particular set of circumstances, but here are some pointers on what to consider:
- Who are the parties? This seems an obvious point, but is the purchaser the individual(s) that have negotiated the deal or a corporate entity? If one of the parties is from a corporate group, which company will be involved? Include contact details for all parties and their advisers – it will save time in the end. Furthermore, if the deal is for a set of assets, what is included and what is excluded?
- What is the purchase price? Details such as any deposit, deferred payments, contingent payments, and any security that is required should all be noted in the Heads. Is the purchase price dependent upon performance of the business or the net assets at completion? What about cash, retained profits or any debts that are currently in the business?
- Are there any conditions to the deal proceeding? This could include further due diligence, the performance of the business, receipt of external funding, tax clearance, regulatory or shareholder approval.
- Should the sellers be restricted from competing with the target business after the sale? The length of time and geographical area should be noted.
- When is this due to happen? Try to be realistic.
The initial time and effort committed to the preparation of a complete set of Heads of Terms can remove much of the pain of corporate transactions and put the parties in the best position to ensure that the deal runs on time, on budget and 11th hour negotiations are avoided.
For help and guidance in all matters regarding your business please contact Mark Daly, a partner at Greene & Greene solicitors in Bury St Edmunds, on 01284 717500 or firstname.lastname@example.org. For more information on Greene & Greene please visit www.greene-greene.com and follow @greenegreenelaw.
This article was first published in Business East Monthly Magazine on July 17 2018.