Heads of Terms (sometimes called a Letter of Intent or Memorandum of Understanding) are a written summary of the key commercial terms agreed between a buyer and a seller, before the detailed legal work begins.

They mark an important milestone in a business sale, but they are often misunderstood.

What Heads of Terms are and aren’t

Heads of Terms are not a final contract. They set out the framework of a proposed deal, so both sides are aligned before investing time, cost, and effort into due diligence and legal documentation.

In most transactions, Heads of Terms are largely non-binding, meaning either party can still withdraw if issues arise during the next stage of the process.

That doesn’t mean they’re informal or speculative, it means they are practical.

Why Heads of Terms exist

Heads of Terms serve three main purposes:

• To confirm that buyer and seller are aligned on price and structure
• To define the scope of due diligence and next steps
• To allow advisers to progress the transaction efficiently

Without them, deals risk drifting, misunderstanding, or unnecessary cost.

What’s typically included

While each deal is different, Heads of Terms usually cover:

• Headline price and payment structure
• Whether the deal is a share sale or asset sale
• Any deferred consideration or earn-outs
• Proposed timelines and exclusivity
• Conditions to completion
• Key assumptions

They focus on commercial intent, not legal detail.

What is legally binding?

Most Heads of Terms are explicitly non-binding on price and completion. However, certain clauses often are binding, such as:

• Confidentiality
• Exclusivity (no-shop provisions)
• Costs

Understanding this distinction is important and something advisers should clearly explain at the outset.

Common misconceptions

A frequent concern from sellers is that a non-binding offer is not a serious one. This is simply how M&A works.

Buyers need the opportunity to carry out due diligence before committing legally. Equally, sellers need protection if assumptions don’t hold or circumstances change.

Heads of Terms allow both sides to proceed with clarity, without premature legal commitment.

How sellers should think about Heads of Terms

For a seller, Heads of Terms should be seen as:

• A signal of serious intent
• A gateway to due diligence
• A point at which only well-qualified buyers should be progressing

The quality of the Heads of Terms and the behaviour of the buyer around them often tells you more than whether they are legally binding.

At Barnsgate, we see Heads of Terms as a filtering mechanism, not a finish line. Our role is to ensure that only credible buyers reach this stage, and that the terms agreed provide a robust foundation for the rest of the process.

Handled properly, Heads of Terms reduce risk rather than create it.