The Ultimate Checklist For Drafting Heads Of Terms
I’ve been asked a few times about heads of terms and what goes into them.
When putting together a formal M&A deal, we use a comprehensive checklist to reach an agreement in principle. The level of detail needed at this stage varies deal-to-deal.
Here are just a few key points to consider:
> Deal Structure. What’s the overall agreement shape? Full or partial company share sale? What percentage upfront vs deferred? Any earn-out provisions? Cash or stock/shares purchase?
> Valuation Method. Since heads of terms precede full buyer due diligence, a simple formula allows the final price to ‘flex’ if financials change before closing. This can protect both parties and avoid last-minute renegotiations.
> Exclusivity Clause. 3–6 months is common, to finalise due diligence and funding.
> Key Personnel. Will the owner(s) remain during a transition period? What are the intentions of senior management and other key people post-sale?
> Condition Precedent. Include any conditions that must be met by either party before executing the agreement, like board approval or third-party contract/asset transfer approvals.
> Final Price Adjustments. If on a ‘cash free, debt free’ basis, the buyer won’t assume any debt or excess cash on the balance sheet. Working capital requirements must be finalised post-due diligence.
Done properly, the heads of terms stage will save time further downstream — either by clarifying expectations upfront or raising early warning flags.
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