What is a Heads of Agreement?

A Heads of Agreement (sometimes called “term sheet” or“letter of intent”) is a short document signed before a full contract. Itspurpose is to record the key commercial points the parties have agreed on andto guide them through to a formal agreement.

It often sets out:

1.     the price or method of calculating it,

2.     the assets or shares to be sold,

3.     timing for due diligence and completion,

4.     who pays for what costs,

5.     whether negotiations are exclusive, and

6.     confidentiality obligations.

Importantly, not everything in a Heads of Agreement isbinding. Unless it is drafted carefully, you may end up with obligations youdid not intend—or no protection at all.

The Risks

1. Thinking you are locked in when you’re not

A Heads of Agreement is usually not the final contract. If it says “subject to contract,” it may have no legal force in relation to thesale itself. One party can walk away, even after months of negotiation.

2. Being bound when you didn’t mean to be

On the other hand, if the wording is too definite, a courtmay decide the parties are already bound. That can trigger tax liabilities,financing obligations, or even a forced sale before you are ready.

3. Uncertainty and disputes

Vague wording such as “a reasonable deposit” or “usualwarranties” leaves too much open to interpretation. Disputes often arise aboutwhat was meant, which defeats the purpose of recording the deal in the firstplace.

4. Wasted time and money

If the Heads of Agreement does not cover exclusivity orconfidentiality, a party could spend money on due diligence only to find theother side is negotiating elsewhere or disclosing sensitive information.

5. Pressure points

Once something is written down and signed, it ispsychologically harder to renegotiate. Even if the clause is non-binding, theother party may treat it as a promise and use it as leverage.

The Remedies

1. Be clear about what is binding

State in plain terms that the document is “not legallybinding, except for the following clauses.” Typically, the binding clauses areconfidentiality, exclusivity, costs, and governing law. Everything else shouldbe expressly “subject to contract.”

2. Use conditions precedent

Make the deal conditional on key steps being completed—suchas due diligence, finance approval, or board consent. That way, you are notlocked in until those steps are satisfied.

3. Keep it specific but limited

Record the key commercial terms (price, timing, structure)precisely, but don’t try to draft the entire contract in the Heads. Leave thedetailed warranties and conditions for the final agreement.

4. Put a time limit on negotiations

Avoid being stuck in limbo. Include a sunset date—forexample, “if a binding agreement is not signed within 60 days, this documentexpires.”

5. Manage costs and expectations

Say who pays for legal, accounting and due diligence costsduring the negotiation period. This avoids later arguments.

6. Get legal advice before signing

Even though a Heads of Agreement is short, it can createmajor consequences. A lawyer can ensure the right parts are binding and therest are not, keeping you in control of the process.

Conclusion

A Heads of Agreement is a useful tool to capture the deal at a high level, give confidence to banks or investors, and set the rules for duediligence.

Handled properly, a Heads of Agreement can smooth the pathto a final contract. Handled carelessly, it can cause confusion, disputes, andunexpected obligations.

Require assistance?

Joe Kafrouni helps business owners and buyersunderstand their options, reduce risk, and move forward with confidence. Ifyou’re considering a Heads of Agreement — or any major business deal — get intouch for clear, practical advice.

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