For anyone looking to buy or a sell a business, a critical question which may arise is whether or not the parties should enter into a Heads of Agreement prior to preparation of a formal Sale Agreement.

Also known as a “Memorandum of Understanding”, a Heads of Agreement is generally a short document which sets out the key commercial terms of the transaction: such as the price, the parties, the assets included in the sale, and any conditions of the sale.

A key benefit of entering into a Heads of Agreement is that it clearly sets out the key commercial terms agreed by the parties before any discussions or negotiations about the legal terms which govern the transaction take place. In short, it enables the parties to reach an “in principle” agreement prior to entering into a formal, detailed legal contract, giving a level of comfort to the parties that each of them are committed to the deal. This is particularly useful for larger and more complex transactions, or where preliminary agreement is required for Board approval.

As a Heads of Agreement only sets out the key commercial terms, it is usually non-binding and conditional upon the parties entering into a formal Sale Agreement. However, this position will depend on the circumstances and nature of the transaction. Whatever the position (i.e. binding or non-binding) it is critically important that the position is clearly stated in the document to avoid any issues or confusion.

In contrast to a Heads of Agreement a formal Sale Agreement sets out the commercial terms of the transaction and the detailed legal obligations and responsibilities of the parties. If the parties have entered into a Heads of Agreement the Sale Agreement will incorporate these. Once the Sale Agreement is agreed and signed, it becomes a legally binding document.

For any queries or more information do not hesitate to reach out.