Buying a Business

5. Signing Heads of Terms

The 'Heads of Terms' agreement sets out the main terms of the sale. This is also called 'Heads of Agreement'.

5.1 Specify what you have agreed to buy.

• This may be the business, or just its assets.
• By buying just the assets, you avoid potential legal liabilities, such as a legal action based on a previous contract.For example, you might buy the fixed assets (equipment etc), stock, debtors and orderbook, and re-employ the people.

5.2 Set out the payment structure.

• The amount may be tied to the profit figures in the next set of audited accounts.
• Parts of the payment may be deferred.
• Payment can be complex.For example, it could involve shares in your own business.

5.3 Agree a period of exclusivity.

For example, the vendor might be prevented from speaking to other buyers for a ten-week period.

• Try to negotiate that your professional advisers' fees will be reimbursed, if the vendor pulls out of the deal.

5.4 List any preconditions you insist on.

For example, the achievement of a particular result (eg a minimum level of audited profits or firm orders, or the sale of an asset).

• You are only committed to purchase the business if the preconditions are met.

5.5 Agree which warranties and indemnities will be provided by the vendor.

• Warranties are written statements which confirm certain key information about the business.For example, covering business assets, audited accounts, orderbook, debtors, creditors, employees, and legal claims.
• An indemnity is a commitment to reimburse you (the buyer) in full, in a specifiic situation. For example, you usually receive a tax indemnity, to cover any undisclosed tax liabilities relating to transactions before the date the business was sold.