Before we dive into the detail, let's establish exactly what Heads of Terms actually are. Heads of Terms are documents which set out the key deal parameters agreed between parties. Whilst not legally binding (other than confidentiality and exclusivity clauses), they help to provide clarity on all key issues early in the process and are an excellent way of protecting value for the seller.
Many advisors will argue that Heads of Terms add an unnecessary layer of complexity to transactions and delay the process. When prospective buyers submit their offers, the supporting offer letters will generally cover the high level terms of the deal. The quality and comprehensiveness of these offer letters will vary, however clearly a buyer will not include anything that they do not want to agree at that point in time - this is what can create issues later in the process.
The Power Shift
M&A processes are all about the balance of power and control. During the early stages of a process, the power rests on the shoulders of the vendor. They have control of the buyers to approach, the information shared and the timetable.
What many people forget, is that this balance of power shifts towards the buyer once exclusivity is granted. At this point, the buyer knows that they are the only "horse in the race" and may take a hard-line approach on certain issues which are yet to be agreed.
Before this transfer of power, it's therefore vital that as many of the key deal issues have been negotiated up front as possible. This is where Heads of Terms become essential. A comprehensive set of Heads of Terms will minimise the ability for buyers to create difficulty during diligence and the latter stages of the process. Not only does this simplify and expedite the process, it also reduces the risk of the deal collapsing and unnecessary cost being incurred.
Bear in mind that patience is a virtue. It's easy to get wrapped up in the momentum of a process and bypass this important step - ensure that you leverage control whilst you still have it....