Exiting your business: Heads of Terms
At the initial stages you might be negotiating with several bidders for your company which, whilst time consuming, enables you to compare offers and strengthens your hand. At some stage, however, you are going to need to choose a preferred bidder. Whilst competition may drive the price up, purchasers are unlikely to be prepared to incur the costs of a detailed due diligence exercise unless they know that their offer has been accepted, subject to contract.
Once you have chosen a preferred bidder, it may be difficult to resurrect the others offers that had been on the table. Consequently you need to assess whether your preferred bidder is likely to be able to complete the deal, and you should, for example, look for evidence that the bidder has the necessary finance in place.
At this point, it is usual to agree heads of terms, being the final offer letter, where the majority of the terms are not binding and are subject to contract. The following matters are normally covered in heads of terms.
Those expressed as 'subject to contract':
- a description of what is being sold
- any pre-sale conditions (such as pre-sale dividends)
- details of the amount of the consideration and the method of payment
- details of how any contingent consideration (the earnout) will be calculated
- the basis of accounting of any completion accounts that will be used to calculate the consideration
- principal conditions of the offer (eg subject to due diligence)
- treatment of any service agreements of the directors and employees
- confirmation that the purchaser has the financial resources to honour the offer
- agreement to the scope of the due diligence, and who will conduct it
- agreement is subject to warranties and indemnities
- details of any restrictive covenants (eg vendors cannot set up a competing business)
- detailed timetable to completion
- confidentiality (if not already agreed)
- exclusivity period
- who will bear the costs (usually each party bears its own costs)
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Where next?
Within Selling your business…- The value of your business
- Finding and approaching prospective buyers
- The information memorandum
- Deciding what you should sell
- Form of consideration
- Due diligence and contract negotiations
- Completion and beyond
- Planning your exit
- Floating your company
- Exiting a partnership or minority shareholding
- Family succession
- Closing down
- Tax issues
- Contact us about this issue
- Read about how we can help you & your family
- Request a meeting with us
