Heads of terms are a preliminary document that records the main points of a business or property deal before anyone drafts the formal contract. The same document goes by other names: letter of intent, term sheet, memorandum of understanding. The label carries little legal weight on its own. What matters is which clauses inside the document are binding and which are not, because most of a heads of terms is intentionally non-binding while certain provisions carry real legal force. Treating the whole document as a handshake is where expensive mistakes start.
What Goes Into Heads of Terms
The document identifies every party by full legal name, entity type, and registration details. For U.S. entities, that usually means including the nine-digit Employer Identification Number the IRS assigns to businesses.1Internal Revenue Service. Understanding Your EIN Errors here cascade into every later document, so verify names and numbers against official filings before signing.
Beyond the parties, heads of terms set out the commercial skeleton of the deal:
- Purchase price, with any breakdown between cash, stock, or deferred payments.
- Deposit or earnest money, scaled to the size of the transaction.
- Conditions precedent: things that must happen before any final contract takes effect, such as securing financing, obtaining regulatory approval, completing satisfactory due diligence, and getting third-party or shareholder consent.
- Timeline for diligence, signing the definitive agreement, and closing.
- Governing law, so a dispute doesn’t begin with an argument over which jurisdiction’s rules apply.
- Stated assumptions about the asset (revenue level, inventory, absence of litigation) that give you a clear basis to renegotiate if those assumptions turn out to be wrong.
- Known third-party consents from landlords, franchisors, licensors, or key customers.
- Cost allocation for legal fees, due diligence, and regulatory filings.
These commercial points are typically non-binding at this stage. They exist so the lawyers drafting the definitive agreement are not guessing at what you agreed.
Which Parts Are Binding and Which Are Not
A document labeled “non-binding” or “subject to contract” is not automatically unenforceable. Courts look past the label and examine what the parties actually agreed to and how they behaved afterward. Under the Restatement (Second) of Contracts, if both sides have assented to all essential terms and are merely planning to formalize the deal in a written contract later, a binding agreement already exists. Calling the document “heads of terms” does not change that.
Courts and legal scholars sort preliminary agreements into three categories:
- Fully binding (Type I). The parties reached consensus on every material term. The planned formal document is just a memorialization. Walking away is a breach of contract.
- Binding to negotiate (Type II). The parties agreed on major terms but left some issues open. They have not committed to the final deal, but they have committed to negotiate the remaining terms in good faith within the framework they set.
- Truly non-binding. The document is clearly preliminary, essential terms remain open, and no reasonable reader would treat it as a final commitment. Even here, specific clauses within it can be enforceable.
Several factors push a court toward finding a binding commitment: the agreement already covers all essential terms, one or both parties began performing, the deal is the type usually documented in writing but the parties pressed ahead without finishing that step, and the sums involved are large enough that the parties took the document seriously. The more of these are present, the harder it becomes to argue nothing was binding.
Clauses Carved Out as Binding
Even in an otherwise non-binding heads of terms, certain provisions are made expressly enforceable. The standard set includes confidentiality obligations, exclusivity periods, dispute resolution mechanisms, and governing law. These clauses typically carry language such as “this section shall be binding on the parties” to remove any doubt. If your document does not clearly label which sections are binding and which are not, a court will have to interpret the document itself, and the outcome may not be what you expected.
The Good Faith Trap
If your heads of terms falls into the Type II category, you have implicitly agreed to negotiate the open terms in good faith. Courts have found this obligation enforceable even when the document does not explicitly mention it. The practical consequence: you cannot sign heads of terms, use the exclusivity period to freeze the other side out of the market, and then invent reasons to walk away. If a court decides you never intended to reach a deal, or that you deliberately sabotaged negotiations, you could owe damages.
The duty requires fidelity to the terms you already agreed. You do not have to accept every counterproposal on the open issues, but you cannot suddenly demand terms fundamentally different from what the preliminary agreement contemplated. Deals go wrong when one side treats heads of terms as a free option. It is not.
Promissory Estoppel
A party that relies on promises in a preliminary agreement can sometimes recover damages through promissory estoppel, independent of the Type I and Type II framework. The doctrine applies when you made a promise, you expected the other side to act on it, they reasonably did, and enforcing the promise is the only way to avoid injustice. Courts have awarded reliance damages under this theory, covering costs the other party incurred because they trusted your preliminary commitment. If you make specific promises about price, timeline, or deal structure, and the other side spends real money on due diligence or preparation based on those promises, walking away is not always cost-free.
Exclusivity, No-Shop Clauses, and Breakup Fees
Most buyers insist on an exclusivity period as a binding clause within the heads of terms. It prevents the seller from marketing the business or asset to other potential buyers during the negotiation window. These periods typically run 30 to 90 days, shorter for simple deals and longer for complex ones.
The variations matter. A no-shop clause flatly prohibits the seller from soliciting or entertaining competing offers. A go-shop clause, more common in larger transactions, gives the seller a defined window after signing to actively seek better offers before exclusivity locks in. A fiduciary-out provision allows a public company’s board to accept a superior proposal if rejecting it would breach their duty to shareholders, even during an exclusivity period.
Breakup fees often accompany exclusivity clauses. If the seller terminates the deal to accept a competing offer, the seller pays the original buyer a termination fee. These fees generally run from about 2% to 4% of total deal value, though they can fall anywhere from under 1% to as high as 6% depending on the transaction. Courts will scrutinize fees that look designed to deter competing bids rather than compensate for legitimate costs. Reverse breakup fees work the other way: they protect the seller if the buyer cannot close, usually because financing collapses.
Drafting to Avoid Ambiguity
The single most important drafting choice is clear labeling. Every section or clause should state whether it is intended to be legally binding. Ambiguity here is what produces litigation.
A few other items are routinely skipped and routinely regretted. State your assumptions about the asset explicitly so that a wrong assumption gives you a clean basis to renegotiate. Identify third-party consents early, before someone discovers a blocking consent two weeks before closing. Address cost allocation up front. And include a termination clause: a mutual right for either party to walk if closing has not occurred by a stated deadline, with each side bearing its own costs, is clean when the non-binding terms really are non-binding. When money has already changed hands, say whether deposits are refundable and spell out any breakup or reverse breakup fees.
Standardized templates can help you avoid missing a field, but they are a starting point. Every deal has terms a generic template will not cover.
What Signing Actually Starts
Signing heads of terms does not close the deal. It starts the work. Due diligence begins almost immediately, with the buyer’s team working through financial records, legal filings, intellectual property, employment contracts, customer agreements, and environmental reports, looking for anything that contradicts the assumptions in the heads of terms or reveals an undisclosed liability. This phase is where deals most often collapse.
In parallel, the lawyers draft the definitive agreement (sometimes called a sale and purchase agreement or acquisition agreement). The heads of terms is the blueprint; the definitive agreement adds representations and warranties, indemnification provisions, post-closing obligations, and closing conditions.
Build realistic deadlines into the heads of terms rather than aspirational ones. Complex transactions regularly take three to six months from preliminary agreement to closing, and regulatory approvals can push that further.
Regulatory Filings to Flag Before Signing
Larger transactions may trigger mandatory government filings that delay closing regardless of how quickly the parties want to move. Neither of these filings changes what belongs in heads of terms, but ignoring them leads to blown deadlines.
Under the Hart-Scott-Rodino Act, parties to certain acquisitions must notify the Federal Trade Commission and the Department of Justice before closing and then observe a waiting period while regulators review the deal for antitrust concerns. For 2026, the basic size-of-transaction threshold is $133.9 million. Transactions exceeding $535.5 million require notification regardless of the parties’ size.2Federal Trade Commission. Current Thresholds Filing fees range from $35,000 for the smallest reportable deals to $2.46 million for the largest.3Office of the Law Revision Counsel. 15 USC 18a – Premerger Notification and Waiting Period Your heads of terms should identify which party pays the filing fee and how the waiting period fits the timeline.
Transactions involving foreign buyers may also require a filing with the Committee on Foreign Investment in the United States. Mandatory declarations apply when the target business produces, designs, tests, or manufactures critical technologies, or when certain foreign governments hold a substantial interest in the acquiring entity.4eCFR. 31 CFR 800.401 – Mandatory Declarations CFIUS review can add weeks or months, and failing to file when required carries significant penalties. If there is any foreign investment angle, flag it in the heads of terms and plan for the review.