How to use Heads of Terms to your advantage
During our formal four-step merger and acquisition process, Stage 3 revolves around the negotiation of the Heads of Terms that will govern the transaction. As we mention elsewhere, this is a crucial milestone that involves good-faith negotiations on behalf of both the buyer and seller. It also lays out a roadmap for deal completion so that both parties can move into the Due Diligence phase. However, before you get there, is it possible to use Heads of Terms to your advantage?
First, let’s define Heads of Terms
Here in the UK, Heads of Terms is traditionally associated with a commercial property transaction. In these types of sales, the goal of the Heads of Terms is to identify the requirements of both the buyer and the seller with regard to the property in question.
While you “own” your business, and potentially the land or building in which it operates, the type of transaction is different. Selling a business is the legal transfer of the ownership of your business.
However, it will still include a Heads of Terms. It is essentially the buyer’s offer to purchase your company. It’s more than a passing interest; rather, it’s a formal, agreed upon by both parties outline of what the seller is giving up and what the buyer is receiving, including the purchase price for said transaction.
Next, what is included in a formal Heads of Terms document?
A moment ago, we mentioned the possibility that your business may own real estate including the land and/or the physical building. Generally speaking, we think of these as the associated assets.
In the Heads of Terms document, all assets that are being transferred from the buyer to the seller will be clearly outlined. Computers, copiers, client lists, products, patents, vehicles, and more should (and will be) clarified during the negotiation of the Heads of Terms.
Now, what are some ways you can use Heads of Terms to your advantage?
The Heads of Terms can be used by both the seller and the buyer to their advantage. We encourage you to not think of this as “pulling one over” the other party. Rather, all negotiations to buy and sell a business should be conducted with good faith, clarity, and cooperation.
However, it’s during this phase that both parties can use the negotiation to achieve certain goals. Depending on what you’re hoping to achieve from this transaction, here is where working with a corporate finance advisor can help smooth over some of the more delicate aspects of the negotiation.
-Retaining or acquiring assets
Does your company own a particular asset you would like to retain? Or, as a buyer, is there a piece of real estate that the seller owns but hasn’t been included to date? It’s during this negotiation that those assets can be retained or acquired.
-Staying on as an employee or an advisor
The buyer has run their business for years, if not decades. Their expertise is invaluable. As some are looking to sell simply due to a desire to focus on other opportunities, it’s here that the idea of retaining the current owner comes into play.
The Heads of Terms document is the formal offer to buy the business. During this time, both parties will highlight and negotiate any outstanding issues with the agreement. If some of the terms can be resolved via a financial adjustment to the offer, it’s here that it will happen.
What happens if the deal goes south?
While we hope this doesn’t happen, it’s not unheard of for a deal to fall apart during Due Diligence. This is frequently due to no fault of either the buyer or the seller, but rather a realization that the terms or transaction simply are no longer viable for one of the two parties.
During Stage 2, approximately 3 months into the M&A process, we put together a list of potential buyers with the client. We call this the Marketing and Sale Programme, and even meet with some of those approved buyers via face-to-face or video conversations.
Now that you’ve been through the process, and know more about what you’re looking for out of the deal, you can use the previous Heads of Terms to your advantage when discussing the transaction with other buyers. In other words, no work goes wasted and all preparation will eventually lead to success.
Work with a corporate finance advisor for the best results
Our goal with our detailed yet proven process is to ensure you achieve your end goal: the successful sale of your business to the right party. We consider both the buyer and the seller our clients, which means we have the best interests of both parties in mind.
If you need help selling your business, or would like to open a dialogue with our team about buying a company, contact us to learn more. Our team will sit down and go over your options and make sure you’re matched with the right opportunity