Most people sign heads of terms feeling relaxed. The deal is agreed in principle, the lawyers will tidy up the detail later, and this is just the document that gets everyone moving. It says “subject to contract” somewhere near the top. How much can it really matter?
More than you think. A heads of terms is part wish-list and part contract, and the line between the two is rarely where owners assume it sits. Some of what you sign binds you the moment you sign it. Most of it doesn’t. And the parts that aren’t legally binding still set the frame for the whole negotiation that follows, usually in the buyer’s favour, because the buyer’s lawyers drafted it.
Whether you are buying or selling, this is the cheapest point in the deal to get good advice and the most expensive point to skip it. Here is what is actually going on in that document.
What it is, and what it isn’t
Heads of terms go by several names: a letter of intent, a term sheet, a memorandum of understanding. The label doesn’t change much. The job is the same: to record the main commercial terms the parties have agreed in principle, before anyone spends real money on due diligence and a full contract.
The point most people miss is that a single document can be partly binding and partly not. A well-drafted heads of terms is explicit about which is which. A badly drafted one leaves it to be argued about later, which is exactly the fight you were trying to avoid.
What’s meant to bind from day one
A handful of clauses are meant to take effect the moment you sign, whatever the rest of the document says about being agreed in principle. The important thing is that they are clearly carved out as legally binding. If the drafting is unclear, you can end up arguing about which clauses bind before you ever get to the deal itself. The clauses usually intended to bind:
Exclusivity. Also called a lock-out, this stops the seller talking to other buyers for a set period. When it is properly drafted it binds, and it is the clause that most often costs a seller money. More on that below.
Confidentiality. Both sides agree to keep the discussions, and anything disclosed during them, under wraps. Sensible, and usually meant to survive even if the deal falls over.
Costs. Who pays for what if the deal collapses. Usually each side bears its own, but not always, and this is worth reading closely.
Governing law and conduct. Which law applies, and sometimes a commitment from the seller to keep running the business normally while the deal is live.
These provisions are the working part of the document. The commercial terms, by contrast, are usually expressed as agreed in principle and not intended to bind. That is the half most owners focus on. It is also the half that, legally, you can still walk away from.
“Subject to contract” — getting the magic words right
“Subject to contract” is the phrase that signals the commercial terms are not yet a binding deal. Used properly, it means there is no contract until the formal agreement is signed. It is genuinely effective, and it is genuinely easy to get wrong.
The danger is partial cover. If the heading says “subject to contract” but a later exchange of emails reads like a firm agreement, or one party starts performing as though the deal is done, a court can find a binding contract has formed despite the label. What matters is what the parties said and did, looked at objectively, not the words at the top of page one. The phrase has to be used consistently, across the heads of terms and across every email and call that follows, right up to signing the main agreement. A single careless message can become part of the evidence that the parties had stopped treating the deal as subject to contract.
Watch the flip side too. A clause saying the parties will “negotiate in good faith” towards a final agreement sounds binding, but under English law an agreement to agree is generally unenforceable — it is too uncertain for a court to police. Don’t lean on it to hold a deal together. If you want certainty, put it in clauses that actually bind: exclusivity, a clear timetable, a defined price.
Exclusivity without buyer obligations is the real trap
Exclusivity is the clause sellers underrate most. When you grant it, you take the business off the market for the buyer’s benefit. You stop courting other buyers, you turn down approaches, and your negotiating leverage quietly drains away with every week that passes. A buyer who knows you have no one else to talk to is well placed to chip the price, add conditions, or simply slow things down.
The problem is not exclusivity itself. It is exclusivity without buyer obligations. An exclusivity period that is open-ended or vague can be unenforceable as well as commercially poor, so insist on three things. A fixed period with a clear expiry date. The clause supported by consideration or signed as a deed, so it actually bites. And milestones, so that exclusivity falls away if the buyer doesn’t produce its due diligence requests, evidence of funding, or a first draft contract by agreed dates. Tie the buyer to progress, and a long lock-out stops being a one-way bet in their favour.
Confidentiality, announcements and controlling the story
A deal in progress is sensitive information. Staff, customers, suppliers and competitors finding out early can do real damage, particularly to a seller. The heads of terms should keep the discussions confidential and control who gets to announce what, and when. Decide who can tell their team, what the line is if word leaks, and who controls any public statement. Get this wrong and you can lose key people or unsettle customers before the deal is even certain to happen.
And what goes into the data room
Signing heads of terms usually triggers due diligence, and that means handing over a lot of information — including personal data about your employees, customers and suppliers. Before any of it goes into the data room, a seller should think about what is genuinely needed at this stage, what can be anonymised or redacted, who on the buyer’s side gets access, and what the buyer is allowed to do with it. The Information Commissioner’s Office expects parties sharing personal data in a deal to have a lawful basis and to handle it properly, so this is a control point, not an afterthought.
Buyers should care too
None of this is purely a seller’s concern. A buyer gets real value from a well-drafted heads of terms: it locks in exclusivity, secures access to the information needed for due diligence, keeps the discussions confidential, can hold the seller to running the business normally, sets out funding conditions, and fixes a timetable so the deal doesn’t drift. Both sides benefit from getting it right — they just benefit from different clauses.
Who bears the cost if it falls over
Deals collapse. Due diligence turns something up, funding falls through, or the parties simply can’t agree the detail. The usual position is that each side carries its own costs, which can still run to real money in legal and accountancy fees. Sometimes a buyer will ask the seller to cover a share of abort costs, or a break fee, if the seller walks. Read the costs clause before you sign, not after the deal has died.
How loose drafting anchors the negotiation against you
Here is the part that does the quiet damage. Even the non-binding commercial terms set the starting point for everything that follows. Once a price, a structure or a key assumption is written down in the heads of terms, it becomes the anchor. Every later move away from it has to be argued for, and the party trying to move is on the back foot.
If the heads of terms says the price is “subject to a normal level of working capital” without defining what normal means, the buyer’s accountants will usually produce the first calculation — and you then spend time and money arguing against a number that should have been pinned down at the outset. If it is silent on how an earn-out is measured, that gap gets filled during the contract drafting, again not in your favour. Vague wording is not neutral. It is a series of decisions you have postponed, and postponed decisions in a deal almost always land with the party who wrote the first draft.
How the heads of terms shape everything after
The heads of terms is not a throwaway. It is the skeleton the whole deal hangs on. The warranties you end up giving, the disclosures you need to make, the conditions to completion, the way the price is adjusted — all of it traces back to what was set out, or left vague, at this stage. Tightening a term here costs an email. Fixing it at completion, when the lawyers are billing by the hour and the other side has leverage, costs a great deal more.
Where the tax and the structure get decided
How a deal is structured — share sale or asset sale, cash or earn-out, any rollover or loan notes — drives what you keep after tax. Those choices are easiest to influence at the heads of terms stage and hardest to unwind once they are baked in. Business Asset Disposal Relief is charged at 18% from 6 April 2026, and that rate is part of the calculation when you weigh up how to take your consideration.
Structure decides what happens to your staff, too. An asset sale will usually trigger TUPE, so employees and their terms transfer to the buyer automatically, with consultation obligations attached; a share sale leaves the employer company unchanged. That is a point to settle with the structure, not after it.
The trap is assuming a paper-for-paper structure is automatically helpful. Where the consideration includes buyer shares, loan notes or rollover equity, the exchange can defer the disposal under sections 135 and 136 of the Taxation of Chargeable Gains Act 1992 — but deferral is not always good news. If the later disposal of what you take won’t qualify for relief, deferral can cost you, and an election or HMRC clearance may be in play. This needs to be settled before the heads of terms are signed, not discovered when the main contract is being negotiated. We sit within the Fusion Consulting Group, so we work alongside our tax and corporate-finance colleagues to get the structure right on paper the first time.
The takeaway
Treat heads of terms as the most important short document in the deal. Get the binding clauses — exclusivity, confidentiality, costs — right, because they bite immediately. Get the “subject to contract” wording right, and keep using it. And don’t let the commercial terms read loosely just because they aren’t binding, because loose wording sets a frame you will be fighting against for the rest of the deal.
If you have been sent heads of terms, a letter of intent or a term sheet, send it to us before you sign. A short review at this stage can prevent a much more expensive negotiation later.
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