Heads of terms: what it means for business borrowing

Heads of terms, also called heads of agreement or a letter of intent, set out the key commercial points of a deal before the legal documents are drawn up. They are used when buying a business, a practice or property, and when agreeing a commercial lease.

01What heads of terms cover in a business purchase

• The price and how it is paid: cash at completion, deferred consideration or an earn-out.
• Whether it is a share purchase or an asset purchase.
• What is included: property, stock, goodwill, contracts, staff.
• Conditions: finance, due diligence, landlord or regulator consents.
• Exclusivity for the buyer for a set period, and confidentiality.
• Timetable and the seller's role after the sale.

02An example

A buyer agrees to pay £1.2 million for a care home business: £900,000 at completion, £300,000 over two years, subject to finance and due diligence, with eight weeks' exclusivity. The heads of terms record those points, and the buyer gives them to lenders so they can see the structure they are being asked to fund.

03Are heads of terms binding?

Usually not, except for clauses expressly stated to be binding, typically exclusivity, confidentiality and sometimes costs. Either side can still walk away, but heads of terms set expectations and are hard to re-open without good reason. Take legal advice before signing.

04How they affect borrowing

Lenders want to see heads of terms early, because the price, the split between upfront and deferred payments and any vendor support decide how much you need to borrow and how the debt is secured. Agreeing them with finance in mind avoids re-negotiating later. If the sale qualifies as a transfer of a going concern, VAT treatment also follows from the structure (VAT Notice 700/9).

See acquisition finance and our guide to vendor finance and deferred consideration. We search the market for lenders suited to the deal you have agreed. Any broker fee depends on the lender, with nothing to pay upfront.

Usually not, except for clauses expressly stated to be binding, typically exclusivity, confidentiality and sometimes costs.

05Related terms

• Goodwill
• EBITDA
• Due diligence

06Sources

• GOV.UK: transfer a business as a going concern (VAT Notice 700/9)
• GOV.UK: Business Asset Disposal Relief