Key Financial Points to Focus on in Heads of Terms

A founder’s guide to protecting value at the earliest stage of a deal

When you receive Heads of Terms (HoTs) from a buyer, it’s tempting to sign quickly - especially if the offer looks attractive. However, these early-stage documents can lock you into financial concepts that are hard to renegotiate later. While HoTs are usually non-binding, they carry moral weight and often form the backbone of the legal agreement that follows.

Here’s what founders should focus on before signing.

1. Enterprise Value vs Equity Value

Most HoTs state the Enterprise Value (EV) - the total value of the business before cash, debt, and normalised working capital adjustments.

You’ll want to understand:

• What qualifies as “debt-like” items? (e.g. tax liabilities, finance leases, bonuses)

• How is surplus cash being handled?

• Is there an adjustment for normal working capital (see further below)?

If the EV is £5m, but you have £1m of debt and £500k working capital shortfall, the final Equity Value could be much lower.

2. Working Capital Mechanism

This is where a lot of value is lost.

Most buyers want the business to deliver a “normalised level of working capital” on completion. If not, the purchase price is adjusted down.

Key questions:

• Is there mention of a working capital target or adjustment?

• Will a completion mechanism or locked box be used?

• Have you reviewed your working capital averages to spot risks?

Errors here can cost hundreds of thousands - make sure this is defined properly up front.

3. Earn-Outs and Deferred Consideration

If any part of the price is deferred or contingent, nail down:

• The exact conditions for payment

• The timing and measurement periods

• What happens if targets are missed by a small margin

• The level of control you’ll retain (or not)

An earn-out can increase the value, or create years of stress if poorly structured.

4. Red Flags and Ambiguities

Look out for vague language like:

• “To be agreed in due diligence”

• “Subject to final accounts”

• “In line with industry standards”

  
  

These phrases favour the buyer. If you don’t define the terms now, you may not like the way they get defined later.

Final Thoughts

Your lawyer will handle the legal terms, but most lawyers expect you to negotiate the financial logic. That’s where we come in.

At Deal Clarity, we offer fixed-fee reviews of Heads of Terms to help founders:

• Protect equity value

• Understand key terms

• Spot risks before they’re signed