What is a heads of agreement?

What belongs on the page

Keep it to the terms that would make somebody walk away. The parties, named as the legal entities that will actually contract. What is being bought or done, described precisely enough that nobody can substitute something cheaper. The price, and if the price moves, the mechanism that moves it. The conditions that must be satisfied before completion, such as finance, a landlord's consent to assign a lease, a licence transfer or a satisfactory inspection. The timetable, with a date for the long form document and a date for completion. And any restraint, retention or earn out, because those are the provisions most likely to blow up later and the ones a seller least expects. Everything else, indemnities, warranties, boilerplate, belongs in the contract and only slows this document down.

The binding core

A heads of agreement is a statement of intention with a small hard centre. Confidentiality protects what each side sees during due diligence, and matters most to the seller, whose customer list and margins are about to be opened up. Exclusivity stops the seller running a parallel process while the buyer spends money on advisers, and it should carry a stated end date rather than a period counted from a vague event. A costs clause says who pays if talks collapse, which is usually each their own. Governing law and jurisdiction round it out. State in one clause which numbered paragraphs bind, and put those paragraphs together so a reader can see the boundary at a glance rather than inferring it from tone.

Why it is worth the two days it takes

Long form drafting is expensive and slow, and the expensive slow part is discovering that the parties never agreed on something fundamental. A seller who assumed stock was included, a buyer who assumed the lease transfers automatically, a founder who assumed the restraint applied only to the same suburb: each of those surfaces in week five of drafting, when both sides have already spent money and neither wants to be the one who walks. Bringing the disagreement forward to week one, onto a page short enough that everybody actually reads it, is the whole return. The document also gives advisers a brief, which is the difference between a first draft that needs comment and a first draft that needs rewriting.

Where these documents go wrong

Precision creep is the usual failure. A page grows into eleven, acquires operational detail, and starts to look enforceable, at which point the parties are negotiating the contract twice. The opposite failure is vagueness dressed as flexibility, where price is described as around, timing as promptly and scope as to be agreed, leaving a document that records nothing anybody can rely on. Between them sits the exclusivity clause with no end date, which quietly runs forever, and the version that never says which paragraphs bind. Each of these is a drafting decision made in an hour that costs weeks later, and each is visible on a careful read before anybody signs.

Handing over to the real contract

Say expressly what happens to this document when the long form agreement is executed: that it ceases to have effect, except for the clauses expressed to survive, and name them. Without that sentence, two documents describing the same transaction sit in the file, and in a dispute each side quotes whichever one helps. It is also worth naming who drafts the long form, since the party holding the pen sets the starting position on everything the summary did not cover, and that advantage is worth more than most of the points argued over in the summary itself. One last practical point: circulate the summary to the people who will run the business afterwards, not only to the people negotiating it. An operations manager reads a stock count method differently from a corporate adviser, and the objection worth hearing usually comes from whoever has to do the counting on the day of completion.

Questions people ask