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Key Differences Between Heads of Terms and Sale & Purchase Agreements

Robert Nilsen, Associate, MDN Group

When preparing to buy or sell a business within the European Union, it is important to understand the various documents that guide the transaction. While negotiations and due diligence often take centre stage, it is equally necessary to know the differing legal instruments that structure the deal. Among the key documents are the preliminary Heads of Terms and the more formal Sale & Purchase Agreement (SPA).

Explore the respective roles of these documents, their defining characteristics, and how they help shape the progression from initial negotiations to a fully executed transaction.

Outlining the Proposal: Heads of Terms

• Preliminary Guidance
  Heads of Terms (often abbreviated as HoT) set out the main commercial points of the intended sale. They create a non-binding framework that helps buyers and sellers align expectations before committing to a legally enforceable contract. By outlining essential details early, both parties can gain a clearer understanding of what the final deal could look like.
• Flexibility and Early Issue-Spotting
  Since HoT documents are not legally binding, they allow parties to adjust significant details, such as price, payment structure, and key conditions, without immediate legal repercussions. This flexibility means both sides can identify and address potential issues before they become obstacles. This reduces the likelihood of last-minute disagreements when drafting the SPA.
• Maintaining Confidentiality and Exclusivity
  Heads of Terms commonly include confidentiality clauses to protect sensitive business information exchanged during preliminary discussions. The HoT may also define a limited exclusivity period, giving the prospective buyer a set timeframe to pursue the deal without competing offers. 

Formalizing the Deal: Sale & Purchase Agreements

• Comprehensive Legal Detail
  The Sale & Purchase Agreement (SPA) is a detailed, legally binding contract that solidifies the negotiated terms. It sets out the final purchase price, payment terms, warranties, indemnities, and any conditions that must be met before the sale is completed. These legally enforceable obligations help prevent misunderstandings, since all key elements of the transaction are stated in a single, definitive document.

• Legal Certainty and Finality
  Once signed, the SPA confers concrete legal rights and obligations on both parties. This binding nature provides certainty and ensures that the agreed terms cannot be easily altered. Additionally, it reduces the potential for disputes after the deal is finalized. If any disagreements occur later, the SPA can serve as a reference point, making it easier to resolve issues through negotiation, mediation, or legal channels.
• Professional Review and Completion
  SPAs are typically drafted and reviewed by experienced legal and financial advisors who have completed the necessary due diligence. By this stage, all major commercial and legal issues uncovered during the HoT phase should be resolved. The final SPA thus acts as the definitive record of the deal, clarifying each party’s responsibilities and liabilities. 

“In our experience, the SPA represents the culmination of extensive groundwork and due diligence,” notes Martin Bakker, Partner at MDN Group. 

Context, Timing, and Practical Considerations in the EU

In many European Union jurisdictions, the process of transitioning from Heads of Terms to the SPA is influenced by a range of regulatory and market-specific factors. Merger control reviews, employment law considerations, and industry-specific regulations may all shape the final structure of the SPA. 

During the transition from preliminary to formal agreements, both parties often consult with local counsel who can provide insight into jurisdiction-specific requirements. This additional guidance helps ensure that the SPA not only reflects the commercial terms agreed upon but also meets all legal and compliance standards.

It is common for negotiations to evolve as the due diligence process reveals new information. Financial records, intellectual property rights, and existing contractual obligations with third parties can all influence the direction and complexity of the SPA. 

In addition, timelines for completing the SPA can vary. While some deals are concluded swiftly, others may take longer due to more complex regulatory filings or the involvement of multiple stakeholders. Understanding that the SPA is the culmination of extensive groundwork helps both parties anticipate realistic timelines and allocate resources accordingly.

According to Denis Stukalov, Managing Partner at MDN Group, establishing this initial framework pays long-term dividends for both parties. “A clear and well-prepared Heads of Terms document helps ensure that all stakeholders enter the final stages of negotiation with a mutual understanding of the deal’s fundamentals.” 

Conclusion

While both Heads of Terms and Sale & Purchase Agreements are essential components of a business sale transaction within the EU, they serve fundamentally different purposes. 

The former provides an adaptable, non-binding outline that guides initial negotiations and identifies key commercial terms. The latter is a legally enforceable contract that finalizes the deal’s structure and safeguards the interests of both buyer and seller.

Peter Hubert, Partner at MDN Group, reflects on this dynamic. “Recognizing the distinct roles that Heads of Terms and the SPA play enables buyers and sellers to approach negotiations with greater clarity and efficiency.”

By recognizing the roles of these documents and appreciating their significance within the European regulatory context, both parties can proceed with greater confidence, transparency, and efficiency.