Heads of Terms (HoT), or memorandum of understanding, are a preliminary non-binding document (with exceptions) signed between seller and acquirer after negotiating the key parameters of a transaction. They formalise the agreement in principle on essential elements — price, structure, closing conditions, post-acquisition governance — before drafting the definitive SPA and the detailed due diligence phase.

Heads of Terms are more detailed than a letter of intent on economic and structural transaction terms, and typically include a formal exclusivity clause during a defined period (30 to 90 days) during which the seller agrees not to negotiate with other acquirers. This exclusivity is often the quid pro quo the acquirer requires before committing to significant due diligence expenditure.

Standard Heads of Terms content: transaction structure (share deal vs asset deal), indicative price and fixing mechanism (locked-box vs completion accounts), conditions precedent (financing, regulatory approvals, due diligence results), expected timeline (signing, closing), warranty terms (amount, duration, mechanisms), seller non-compete post-closing, and transitional governance arrangements.

Example: after 3 weeks of negotiation, seller and acquirer sign Heads of Terms fixing an indicative EV of CHF 15.5 million (locked-box at 31 December 2024), a 60-day exclusivity clause, a maximum earn-out of CHF 2.0 million conditional on Year N+1 results, and a warranty cap of 20% of EV over 24 months. Due diligence starts within 5 business days.

At Hectelion, we draft and negotiate Heads of Terms in our M&A mandates, securing key transaction parameters before committing due diligence costs.