For Sellers
Heads of terms should preserve the commercial value of the offer, identify conditions attached to payment and limit unexpected obligations after completion.
Heads of Terms for a Law Firm Sale or Merger
Call in Confidence: 0800 246 5016
Practical law firm sale guidance
Agree the Main Deal Before the Legal Documents Take Over
Heads of terms record the principal commercial points agreed between a buyer and seller before detailed due diligence and transaction documents are completed.
They help both sides identify important differences early. They are not a substitute for legal, tax, accountancy, regulatory or insurance advice.
Important: This is a general guide, not a precedent or legal advice. Every transaction is different. Buyers and sellers should instruct their own solicitors, accountants, tax advisers and insurance advisers before signing heads of terms.
What Are Heads of Terms?
Heads of terms, sometimes called a term sheet or memorandum of understanding, set out the proposed basis of a transaction. They are normally prepared after the parties have discussed the main commercial deal but before significant time and money are spent on due diligence and the sale agreement.
A useful document is specific enough to show what has actually been agreed. It should also identify matters that remain open. Vague wording can merely postpone the disagreement until later.
For Buyers
Heads of terms should define the intended acquisition, the information required for due diligence and the protections needed if the facts differ from the original proposal.
Are Heads of Terms Legally Binding?
Often, most commercial provisions are intended to be non-binding and subject to contract. That does not mean every provision is automatically non-binding.
Usually Intended to Be Non-Binding
- Proposed transaction structure
- Indicative price
- Proposed completion date
- Outline warranties and indemnities
- Proposed handover arrangements
Often Drafted to Be Binding
- Confidentiality
- Exclusivity or a no-shop period
- Responsibility for professional costs
- Access to and return of information
- Governing law and jurisdiction
Binding status depends on the language used, the surrounding circumstances and the parties’ conduct. The document should state clearly which provisions are intended to bind and which are subject to contract. Obtain legal advice before signing.
What Should Law Firm Heads of Terms Cover?
The precise contents depend on whether the transaction is a share sale, asset sale, merger, partnership arrangement or transfer of part of a practice. The following points normally require consideration.
Parties and Authority
Identify the legal entities and individuals involved. Confirm who has authority to negotiate and who will sign the final documents.
Transaction Structure
State whether the proposal is a share purchase, asset purchase, merger, transfer of files or another structure. Identify exactly what will and will not transfer.
Price and Payment
Record the proposed price, payment dates, deferred consideration, retention, earn-out, interest and any adjustment mechanism.
Work in Progress and Debtors
Explain how WIP, unpaid bills, disbursements and debtors will be valued, collected and divided. Avoid leaving this to assumption.
Assets and Liabilities
List the main assets included and excluded. State which liabilities the buyer is expected to assume and which remain with the seller.
Due Diligence
Define the scope, access arrangements, confidentiality controls and target dates. State that the proposal remains subject to satisfactory due diligence where appropriate.
Staff
Record the intended treatment of employees and consultants. Identify the need for TUPE, employment and pension advice without assuming the legal outcome.
Premises and Systems
Cover leases, licences, equipment, case-management systems, telephone numbers, domains, software, data and supplier contracts.
Owner Involvement
Set out any proposed consultancy, employment, handover or client-introduction period, including duration, duties, pay and exit arrangements.
Regulatory Conditions
Identify any approvals, notifications, authorisation changes, manager or owner approvals and other regulatory conditions needed before or after completion.
Timetable
Include target dates for due diligence, finance, approvals, transaction documents, exchange and completion. State what happens if dates are missed.
Confidentiality and Exclusivity
Define what is confidential, who may receive it, how long exclusivity lasts and which discussions or approaches are prohibited.
Seller and Buyer Priorities
| Issue | Seller’s Typical Concern | Buyer’s Typical Concern |
|---|---|---|
| Price | Certainty of amount and payment | Ability to adjust for findings and performance |
| Deferred consideration | Security, payment dates and buyer default | Protection if value or revenue is not delivered |
| Due diligence | Defined scope, confidentiality and sensible timescale | Full access to material financial, client, staff and regulatory information |
| Exclusivity | Short, conditional period with evidence of progress | Enough time to investigate and negotiate without competing bidders |
| Handover | Clear end date, duties and remuneration | Continuity of client relationships and operational knowledge |
| Risk | Limits on warranties, indemnities and continuing liability | Protection against undisclosed liabilities and inaccurate information |
Law Firm-Specific Points
A law firm transaction involves issues that do not arise in an ordinary trading-business sale. Heads of terms should identify how these points will be addressed, even if the detail is left to the transaction documents.
- Client files: proposed transfer process, client communications, consent where required and storage of closed files.
- Client money: reconciliation, residual balances, outstanding disbursements and the date on which the seller stops holding or receiving client money.
- Undertakings: identification, transfer or discharge of outstanding undertakings.
- Professional indemnity insurance: successor-practice implications, run-off cover, prior-practice liabilities and insurer notification.
- Regulatory status: SRA or other regulator notifications, ownership and manager approvals, closure or authorisation changes.
- Open matters: responsibility for ongoing work, complaints, claims, limitation dates and high-risk files.
- Panels and contracts: lender panels, legal-aid contracts, accreditations and supplier arrangements may require consent or fresh applications.
- Data and systems: lawful transfer, access controls, cyber security, backups, retention and deletion responsibilities.
Relevant firms should review the SRA’s warning notice on mergers, acquisitions and sales of law firms and its guidance on closing a practice. Current requirements should be checked for the transaction rather than copied from an earlier deal.
Clauses Requiring Particular Care
These provisions are not automatically unreasonable, but they should not be accepted without understanding their financial and practical effect.
Deferred and Contingent Price
Define the calculation, evidence, payment date, control of the business, set-off rights and what happens if the buyer changes the operation.
Price Adjustments
Specify the accounts, reference date, accounting policies, dispute process and whether WIP, debtors, cash or liabilities affect the price.
Personal Guarantees
State the amount, duration, trigger and release mechanism. A broad or unlimited guarantee can materially alter the risk of the deal.
Warranties and Indemnities
Heads should outline the expected approach without treating detailed legal protections as settled before disclosure and due diligence.
Restrictive Covenants
Define the activities, clients, area and duration proposed. The parties should obtain advice on enforceability and proportionality.
Exclusivity and Abort Costs
Set a clear end date, required milestones and termination rights. Be cautious about paying the other side’s costs merely because a deal does not complete.
Do Not Treat the Headline Price as the Whole Offer
A higher price can be worth less if it is heavily deferred, conditional on future income, exposed to broad set-off rights or dependent on a lengthy unpaid handover. Compare the amount, timing, security and conditions of payment together.
From Offer to Completion
1Offer in PrincipleParties identify the proposed structure and main commercial terms.
2Heads of TermsAgreed and open points are recorded, with binding provisions clearly marked.
3Due DiligenceFinancial, legal, regulatory, client, staff and operational information is reviewed.
4Transaction DocumentsSolicitors prepare and negotiate the sale, merger and related agreements.
5Conditions and CompletionApprovals, finance and practical arrangements are completed before the transaction takes effect.
Heads of Terms FAQs
Are heads of terms compulsory?
No. Parties can move directly from an offer to due diligence and transaction documents. Heads of terms are nevertheless useful where the deal has several commercial points, deferred payments, staff, premises, regulatory issues or a detailed handover.
Who should prepare the heads of terms?
A broker or the parties may record the commercial outline, but each party should obtain independent legal advice. Solicitors should settle the wording where any provision is intended to bind or where the transaction is complex.
Can we use an online or AI-generated template?
A template may help identify topics, but it will not determine the right transaction structure, tax treatment, regulatory steps or allocation of risk. Generic wording can also create uncertainty about which provisions bind. It should not replace transaction-specific professional advice.
Should the buyer pay a deposit?
There is no universal rule. If a deposit is proposed, the document should state who holds it, whether it is refundable, when it may be retained and how it is treated on completion. Both sides should take advice before payment.
How long should exclusivity last?
Long enough for an organised buyer to complete the agreed work, but not indefinitely. The period should reflect the transaction, finance and regulatory timetable and should contain clear milestones and termination rights.
Do heads of terms fix the final price?
Not necessarily. The document should say whether the figure is fixed, indicative or subject to adjustment. It should identify any dependency on due diligence, completion accounts, WIP, debtors, client retention, profit or future fee income.
When should the SRA be contacted?
The answer depends on the structure and regulatory changes involved. SRA guidance currently requires firms to notify relevant closures, acquisitions, mergers and changes through the applicable process. The parties should identify the required steps early and confirm the current requirements directly with the SRA or their regulatory advisers.
Discuss a Law Firm Sale or Merger
Jonathan Fagan Business Brokers assists with commercial negotiations and keeping transactions moving. We do not replace the separate solicitors, accountants, tax advisers, insurers or regulatory advisers instructed by the parties.
Call in confidence on 0800 246 5016 or email jf@jonathanfagan.co.uk.
General FAQ's
What is a Shell Law Firm?
What does a business broker do?
Why is there a surge in buyers looking to acquire law firms in September and October each year?
Why are there so few accountancy firms for sale on your website?
Do you provide accountancy practice valuations?
Are business brokers regulated?
What underhand tactics do business brokers use?
How secure is our data?
Do you offer due diligence services?
