Heads of Terms in the context of a business acquisition
Once a buyer and seller of a business have reached a mutual agreement to proceed with the acquisition or disposal they typically agree to Heads of Terms.
The exact legal position of the Heads of Terms can vary considerably from document to document though typically the aim is to:
1. Agree general terms around the valuation of the business (eg value of shares, adjustments for debt, adjustments for working capital)
2. Agree an exclusivity period for the acquirer to perform due diligence on the acquisition target. During which time the seller will not approach other parties.
3. Agree an outline for the warranties and indemnities to be included in the Share Purchase Agreement (“SPA”).
4. Agree confidentiality over the transaction.
Normally it will not be intended for the Heads of Terms to be considered a legally binding document (and may state just that). Instead it is a way of the parties to formalise their mutual understanding of the proposed transaction and devise a way forward to completion.
Although not legally binding the document can be morally binding to an extent. The assumption will be that there will be little deviation from the Heads of Terms without good reason. Significant deviation is likely to damage the goodwill between the parties. For this reason it makes sense to ensure the correct advice is sought by advisers at this early stage.
With regards to financial due diligence you should engage an expert to review the Heads of Terms prior to signing to ensure that it doesn’t put the acquirer in a detrimental opening position with regard to future debt or working capital negotiations.
If you would like to discuss Heads of Terms further or have any other questions about due diligence please feel free to contact us.
HOW CAPRICA ONLINE ACCOUNTANTS CAN HELP
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