Heads of terms vs LOI: what you're really signing

The handshake feels like the end of the negotiation. It isn't — it's the start of the document that decides how the rest of the deal goes. Here's what heads of terms actually do, which parts bind you, and what to test before you put your name to one.

They are the same thing

Heads of terms, HoTs, letter of intent, LOI, term sheet, memorandum of understanding — in UK SME deals these are interchangeable names for one document: a short summary of the agreed deal, signed before anyone spends money on a share purchase agreement. US buyers and brokers tend to say LOI; UK advisers tend to say heads of terms. Neither label changes what the paper does.

Which parts actually bind you

The commercial terms are normally "subject to contract" and not binding. A handful of clauses usually are:

Exclusivity (lock-out). The seller agrees not to talk to anyone else for a fixed period. Enforceable, and the single most valuable thing the buyer gets from the document.
Confidentiality. Often carried over from an earlier NDA, sometimes restated and widened.
Costs. Who pays their own fees, and whether any break costs apply if one side walks.
Governing law and jurisdiction. Routine, but read it if either party is offshore.

Everything else — price, structure, warranties, timetable — is an expression of intention. Which is precisely why the intention needs to be right: it is the anchor every later negotiation drags against.

What good heads of terms say about price

Weak HoTs say "£1.2 million". Strong ones say what the £1.2m is made of and what it assumes:

The adjusted profit figure the price is based on, and whether it is SDE or EBITDA.
The multiple applied, and the period the profit is drawn from.
Cash-free, debt-free with a normal level of working capital — and how "normal" will be calculated.
The split between completion cash, deferred consideration, loan notes, earn-out and any retention or escrow.
What happens to surplus assets, property, director loans and stock.
The conditions the buyer is allowed to reprice against, stated narrowly.

A deal defined this tightly is much harder to chip later, because the buyer has to explain which stated assumption turned out to be wrong. See SDE vs EBITDA for why the profit definition matters as much as the multiple.

Exclusivity: what it costs the seller

The moment exclusivity starts, the seller's alternatives disappear and leverage moves to the buyer. That is not a reason to refuse it — no serious buyer will fund diligence without it — but it is a reason to shape it:

Six to ten weeks, not six months.
Extensions by agreement only, not automatic.
Milestones attached: proof of funding, diligence list issued within X days, draft SPA by a stated date.
A right to terminate exclusivity early if the buyer reduces the price without a diligence-based reason.

Where value quietly leaks after signing

Most of the money lost between heads of terms and completion isn't lost in the headline. It goes in the mechanics:

Working capital targets. Set the peg at the wrong point in the cycle and a seller can hand over six figures of value without the price changing at all.
Net debt definitions. Whether the buyer treats deferred VAT, accrued holiday pay, hire purchase, director loans or customer deposits as debt is worth arguing about now.
Retentions and escrow. Amount, trigger, release date and who holds it.
Earn-out drafting. The measure, the control, the period and the protections. Covered in detail in our guide to earn-outs and deferred consideration.
Restrictive covenants and the seller's post-completion role. Length, scope, pay and notice.

The order most people get wrong

The common sequence is: agree a price, sign heads of terms, instruct solicitors, start diligence — and only then discover the earnings won't support the multiple, or the structure means the seller receives far less than the headline suggests. By that stage £5,000 to £25,000 of fees have been spent and both sides are emotionally invested.

The cheaper sequence puts one step first: an independent commercial review of the agreed price and structure before signing. Your solicitor advises on the drafting; they don't advise on whether the number is right. That's a deal agreed sense check — a written report in 3 working days for £495, which is a rounding error against the diligence and legal budget it protects.

A short pre-signing checklist

Which paragraphs are binding? Read them separately.
Is the price expressed with its assumptions, or as a bare number?
Is it cash-free, debt-free, and is "normal working capital" defined?
How much lands on completion, and how much is contingent?
How long is exclusivity, and what does the buyer have to do during it?
What can the buyer reprice against, and how narrowly is that stated?
Has anyone independent tested the multiple and the adjusted earnings?

Common questions

Are heads of terms legally binding in the UK?

Mostly not, but partly yes. The commercial terms — price, structure, timetable — are normally expressed as subject to contract and are not binding. Exclusivity, confidentiality, costs and governing law clauses usually are binding, and are enforceable on their own terms. Always check which paragraphs are carved out as binding before signing.

What is the difference between heads of terms and a letter of intent?

In UK SME transactions there is no meaningful legal difference. Heads of terms, HoTs, letter of intent, LOI, memorandum of understanding and term sheet all describe the same document: an outline of the agreed deal signed before drafting the share or asset purchase agreement. What matters is the content and which clauses are binding, not the label.

How long should an exclusivity period be?

For most UK SME deals, six to ten weeks is normal, extendable by agreement. Anything beyond twelve weeks locks a seller out of the market for a long time with no certainty. Sellers should tie exclusivity to the buyer meeting milestones — funding confirmation, diligence starting, draft SPA issued — rather than simply to a date.

Can price be renegotiated after heads of terms are signed?

Yes, and it frequently is — usually downwards, once diligence has started and the seller is inside exclusivity. That is exactly why the price and the assumptions behind it should be tested before signing, not after. A well-drafted HoT states the earnings figure, the multiple and the basis on which the price was set, which makes an unjustified chip harder to land.

Should I get heads of terms checked before signing?

A solicitor should review the legal drafting, but they will not tell you whether the price is right or what the payment structure is worth. An independent commercial sense check — valuation, structure and mechanics — is a separate and cheaper exercise, typically £495, and it happens before the legal and diligence budget is committed.

The Business Valuers provides independent, fixed-fee valuations and deal reviews for UK SMEs. This article is general commentary, not legal advice or a valuation of any specific business.