Heads of Terms are short, pre-legal term sheets that lock deal economics, risk allocation, and process before lawyers draft full documents. A UK SME HoT Template Pack standardizes those term sheets across typical small deals so teams can make go or no-go decisions quickly and avoid costly re-trading later. Think of it as the checklist that keeps price, governance, and conditionality honest.
What the HoT Template Pack covers and why it matters
A UK SME HoT Template Pack spans share purchases, asset purchases, minority or growth equity, and debt or quasi-debt such as term loans, unitranche, and convertibles. Riders address earn-outs, vendor loan notes, security and guarantees, and warranty and indemnity insurance. The pack does not replace an SPA, APA, loan agreement, or investment documents. Instead, it ensures those documents reflect the agreed economics and the intended risk split with clarity on certainty and cost.
Stakeholders and the clarity they need upfront
- Buyers and lenders: Early exclusivity, an explicit diligence path, and a firm view on approvals and consents before paying fees help deliver timing and close certainty.
- Sellers: Clear pricing, minimal conditions, and evidence the buyer can fund increase close certainty and support optics with the board or investors.
- Management: Defined roles, rollover economics, leaver terms, equity upside, and indemnity backstops support alignment and retention.
- Insurers, banks, co-investors: Consistent terms allow faster underwriting and approvals, which reduces both time and cost.
Binding vs non-binding: get enforceability right
Use English law and the English courts for consistency. Only confidentiality, costs, exclusivity, governing law, announcements, and sometimes non-solicit should bind. Label the rest “subject to contract” in the header and footer, and avoid promissory phrasing in non-binding sections to reduce pre-contract reliance disputes. This prevents litigation risk and focuses everyone on moving to definitive documents.
The template backbone that makes deals comparable
Each template should follow a common spine so teams can compare deals fast and spot gaps:
- Parties and structure: Entities, jurisdiction, transaction type, and any SPV.
- Consideration: Price, currency, cash versus rollover versus vendor loan versus earn-out, payment mechanics, and escrow or holdback.
- Adjustments: Locked-box or completion accounts, net debt and working capital, timing, and verification rules.
- Conditions: NSIA, third-party consents, shareholder approvals, financing sources, confirmatory diligence, and relevant tax clearances.
- Warranties and indemnities: Scope, caps, baskets, survival periods, intended W&I coverage, and identified gaps.
- Covenants: Pre-completion conduct, non-compete or non-solicit, duration, and transitional services.
- Governance and information: Board, vetoes, reporting, and reserved matters for rollover or minority stakes.
- Security and guarantees: Collateral scope, priority, intercreditor terms, registration responsibilities, and negative pledge.
- Timeline and process: Longstop, exclusivity length, data room readiness, and milestones.
- Costs and fees: Party costs, broken-deal treatment, adviser fees, and W&I premium payer.
- Binding provisions: Confidentiality, exclusivity, costs, governing law, announcements, and counterparty identity disclosure rules.
Deal-type specifics: what to lock in early
Share purchase: essential economics and risk
- Scope: Entire issued share capital versus carve-out, options and warrants treatment, and drag and tag for minorities to secure close certainty.
- Price and adjustments: For locked-box, set the effective date, permitted leakage, and interest rate on leakage. For completion accounts, set headline metrics, the accounting hierarchy, and expert determination to avoid disputes.
- Risk allocation: Tie warranty scope to business-critical areas and add specific indemnities for known issues. Define cap, basket, de minimis, and survival aligned to any W&I policy. Many SME deals pair W&I with a nominal seller cap and buyer-borne retention to balance cost and optics.
- People: Management rollover, option treatment, EMI plans, and leaver provisions with an eye on retention and tax.
- Conditions: NSIA where in scope, merger control if applicable, foreign approvals for non-UK parents, and shareholder thresholds.
- Funding: Evidence of funds or term sheets annexed. Competitive processes typically exclude financing conditions to preserve close certainty.
Asset purchase: isolating liabilities from day one
- Asset perimeter: Tangible and intangible assets, IP and registrable assignments, assumed contracts, inventory cut-off, and excluded liabilities. Address potential title defects early.
- TUPE: Transfer scope, pre or post-transfer liability split, consultation plan, and payroll cut-over to manage HR risk.
- Property: Freehold versus leasehold, landlord consents, SDLT, and timing for lease assignments. Clarify any freehold vs leasehold edge cases upfront.
- Tax and VAT: Aim for TOGC status to avoid VAT. Allocate responsibility if TOGC fails to manage cash flow.
- Contracts and licenses: Assignability and change-of-control consents, transitional services for non-assignable contracts, and responsibility for consents to protect continuity.
- Price allocation: Allocate consideration by asset class for tax with an apportionment schedule.
Minority or growth equity: governance drives value
- Securities: Ordinary versus preference shares, liquidation preference structure, dividend policy, anti-dilution (weighted average is typical), and conversion mechanics.
- Governance: Board composition, investor director or observer rights, quorum, reserved matters thresholds, and protective provisions on issuances, M&A, and budgets.
- Information: Monthly management accounts, audited annuals, budgets, KPI packs, and covenants if relevant.
- Exit: Drag and tag, IPO provisions, buyback rights, and time-based liquidity steps with a longstop to initiate an IPO or sale.
- ESOP: Pool size, top-ups, pre or post-money basis, EMI intent, and compliance responsibilities.
- EIS or SEIS: State eligibility intent, structure ASAs pre-pricing with longstops, and avoid protections that could taint relief.
Debt and convertibles: certainty and priority
- Facilities: Type, amount, tenor, margin or base rate, fees, amortization, and call protection to balance cost and flexibility.
- Security and guarantees: All-asset debenture, share pledges, cross-guarantees, and clear assignment for charge registration within 21-day deadlines to preserve priority.
- Covenants: Maintenance covenants such as leverage or interest cover, or incurrence tests for unitranche, plus information covenants, negative pledge, restricted payments, and acquisitions or disposals baskets.
- Intercreditor: Super senior RCF versus unitranche priority, payment blockage, enforcement standstill, and turnover mechanics.
- Transfers: Lender-of-record constraints, minimum holds, borrower consent, and white or black lists to manage syndication risk.
- Convertibles and ASAs: Discount or valuation cap, maturity and interest, conversion triggers, MFN, and EIS or SEIS treatment. ASAs need no redemption and a short longstop to qualify.
- Withholding and treaty relief: UK yearly interest is typically subject to 20 percent withholding unless exemption or treaty relief applies. Plan for treaty clearances, QPP exemption, or quoted Eurobond to protect cash flow.
For readers deep in private credit, this primer on unitranche loans provides context on pricing and structures.
Funds flow and earn-outs: design to avoid disputes
- Equity and acquisition funding: Equity into BidCo, debt drawn at BidCo, BidCo acquires shares or assets, security granted over BidCo or Target. W&I premium is paid at signing or completion per broker practice. Cash to sellers is adjusted for escrow or holdback, and rollover equity is issued at close.
- Debt draw and security: Fund on CP satisfaction, execute debentures and share charges, file charges within 21 days, and run intercreditor and hedging in parallel to maintain close certainty.
- Earn-outs: Define the period from completion, set the metric such as EBITDA, revenue, or gross profit, lock accounting policies, specify caps or floors, and add change-of-control acceleration. Use escrow and expert determination to resolve disputes efficiently.
For calculation frameworks, see a practical overview of earn-out calculation methods.
Documents and drafting: assign work early
- Share purchase: SPA (buyer counsel), disclosure letter (seller), tax deed (buyer), completion minutes, share transfers, and W&I policy. Pre-agree drafting party and form references to accelerate speed. A short read on the Share Purchase Agreement helps align terminology.
- Asset purchase: APA (buyer counsel), assignments and novations, IP assignments, TSA, employee transfer letters, property documents, and a completion checklist.
- Growth equity: Subscription and shareholders’ agreement (investor counsel, with BVCA models as reference), articles, resolutions, option plan, and an investor rights side letter if needed.
- Debt: Facility agreement (lender counsel using LMA forms), debenture and share charges, intercreditor or deed of priority, security trust, account control agreements, and a CP checklist.
- Tax and corporate: Board approvals, any solvency statements, PSC updates, and stamp duty on shares at 0.5 percent payable by the buyer and rounded to the nearest £5.
- Regulatory: NSIA notifications, tactical CMA engagement, sector approvals, and KYC or AML onboarding.
Economics and fees: upfront and recurring
- One-off: Legal, financial and tax diligence, W&I premium and underwriting fee, financing arrangement and agency fees, stamp duty on shares at 0.5 percent, SDLT on land, and Companies House filings.
- Recurring: Debt agency and monitoring, private credit monitoring, investor director fees, audit fees, and data production for covenant monitoring.
- Illustration: On a £10m cash-free debt-free share purchase, net debt of £2m and a £0.5m working capital deficit yield a £7.5m net price. The buyer places £0.5m in escrow for 12 months. W&I at 1.0 percent equals £100k plus tax. Stamp duty is £50k. The seller receives £7.0m at completion after escrow and stamp duty, with an earn-out up to £2m paid later if targets hit.
Accounting and reporting flags: agree the rules
- Business combination vs asset acquisition: Under IFRS 3, treat transactions with inputs and processes that produce outputs as business combinations. Contingent consideration in business combinations is fair-valued at acquisition and remeasured under IFRS 9. Asset acquisitions treat contingent payments as purchase price adjustments when probable and measurable.
- UK GAAP (FRS 102): Amendments effective for periods beginning on or after 1 January 2026 change revenue and leases. Align earn-out metrics with the chosen framework to avoid disputes.
- Consolidation: IFRS 10 control drives consolidation. Protective minority rights typically avoid control. Use the equity method under IAS 28 where significant influence exists. Lenders carry loans at amortized cost unless designated at fair value. Convertibles may require host and derivative split.
- Disclosures: Plan for related party, business combination, and contingent liability disclosures at the HoT stage for audit readiness.
Tax markers: structure to protect cash
- Stamp taxes: Shares at 0.5 percent stamp duty. Asset deals may trigger SDLT on land and buildings. VAT may apply unless TOGC criteria are met.
- Interest withholding: Yearly UK interest to non-UK holders is usually 20 percent unless treaty or statutory relief applies. Structure for exemptions or clearances.
- Hybrid mismatches: Review convertibles, preference shares, and cross-border instruments for UK hybrid rules to protect deductibility.
- Transfer pricing: Intra-group loans need arm’s-length terms and documentation. Flag in HoT if shareholder or related-party debt is contemplated.
- EIS or SEIS: Keep ASAs within HMRC parameters and avoid debt-like protections or pre-priced valuations if relief matters.
Regulatory and compliance markers: timetable the friction
- NSIA: Allocate notification responsibility, factor longstop impacts, and prohibit completion before clearance where mandatory.
- Merger control: The UK regime is voluntary but the CMA can call in transactions. Include cooperation covenants and any standstill.
- AML and KYC: Align on KYC packs and timelines. Update the PSC register at completion.
- Data protection: Set confidentiality, data room access limits, and deletion obligations if exclusivity ends. Keep UK GDPR in view.
- Financial promotions and AIFMD: Check exemptions for outreach to UK targets and co-investors, and keep reporting obligations current.
Risk points and edge cases: preempt and prevent
- Non-binding drift: Repeat “subject to contract” and keep completion-style obligations out of non-binding sections.
- Financing certainty: Attach evidence of funds or commitment letters if referenced to avoid friction.
- Earn-out ambiguity: Lock the accounting hierarchy and operational covenants. Define expert determination scope.
- TUPE: Set the consultation plan and indemnities early.
- IP gaps: Require pre-completion assignments for contractor-developed IP and add a specific indemnity placeholder.
- Security perfection: Assign registration tasks and set a 21-day filing timetable.
- Intercreditor alignment: Define ranking, waterfalls, and vetoes if multiple lenders or shareholder loans exist.
- NSIA long tails: Use realistic longstops, backstop price or time adjustments, and clear walkaway mechanics.
Comparables and alternatives: choose the right tool
- LOIs vs HoTs: LOIs tell stories. HoTs mirror downstream legal sections and cut re-trade risk.
- BVCA models: Helpful anchors for growth equity terms and governance.
- LMA term sheets: Align definitions and covenant baskets to reduce negotiation cycles.
- SAFE vs ASA: For UK tax relief, ASAs beat US-style SAFEs for investor demand.
- Heads of Terms basics: For small joint ventures, see this plain English Heads of Terms checklist for a comparable structure.
Execution timeline: a simple, predictable cadence
- Day 0 to 5: Align commercials and build the data room. Circulate the right template with riders. Confirm parties, structure, price headline, conditionality, and the diligence index. Name a deal captain on each side.
- Day 5 to 10: Converge on price mechanics, W&I intent, consents, and timeline. Attach lender term sheet plus CPs or equity cap table and pro forma.
- Day 10 to 15: Secure IC and credit approvals. Execute exclusivity for 4 to 8 weeks depending on regulatory and financing complexity. Set longstop and extension rules.
- Day 15 to 45: Run confirmatory diligence and commission first legal drafts off the HoT. Start W&I underwriting Q&A. Kick off TUPE, IP assignments, and landlord consents in asset deals.
- Closing: Satisfy CPs, finalize funds flow, sign completion documents. File security within 21 days. Update statutory registers and any filings at Companies House.
Negotiation levers that actually move value
- Price vs conditionality: Sellers trade conditions for price. Buyers trade speed and exclusivity for diligence and risk protection. Lock those trades in the HoT.
- Locked-box details: Use a modest, reference-linked leakage interest rate. Define permitted leakage by clear categories to protect cash.
- Warranty cap and W&I: Pair low seller caps with W&I and higher retention when diligence is thinner. Otherwise, raise caps and use escrow. Split fundamental versus business warranties and align survival with insurer norms.
- Earn-out governance: Decide on hiring, capex, pricing, and expansion rights up front. Fix the accounting hierarchy to prevent later disputes.
- Board and veto rights: Calibrate vetoes to protect value without creeping into day-to-day control that hurts EIS eligibility or triggers consolidation.
Why this pack shortens cycle time
- Standard language: BVCA and LMA anchors reduce variance and eliminate definitional fights.
- Pre-allocated risk: Counsel implements rather than re-negotiates, lowering cost and shortening timelines.
- Downstream constraints: NSIA, TUPE, PSC updates, security registration, and tax filings are baked into timelines and longstops for close certainty.
- Aligned underwriting: Insurers and lenders engage earlier with fewer surprises when terms map to their underwriting needs and CPs.
A practical add-on: a 10-minute readiness scorecard
To add fresh value, staple a one-page scorecard to the HoT pack. In ten minutes, the team can rate red, amber, or green on:
- Funding evidence: Are signed commitment letters or proof of funds attached and current?
- Regulatory path: Are NSIA or merger control analyses in the data room with realistic longstops?
- Accounting policy lock: Are completion accounts or locked-box hierarchies and expert rules drafted?
- People plan: Are rollover, option treatment, and leaver terms explicit and tax-checked?
- Data room index: Are the top 25 items ready, including tax returns, contracts, IP, and HR schedules?
- Security checklist: Are debenture or charge forms and a 21-day filing calendar prepped?
- Earn-out mechanics: Are metrics, caps, escrow, and change-of-control triggers complete?
- Disclosure workstreams: Are related party and contingent liability disclosures scoped to avoid audit surprises?
- Property consents: Are landlord and license assignments mapped if leases sit at the core?
- Close playbook: Is a draft funds flow and closing checklist circulated for comment?
Governance and version control: keep one source of truth
- Single master: Keep one master version with redline history and a dated change log. Central ownership avoids drift.
- Cross-references: Tie definitions across sections so edits propagate. Example: earn-out definitions should tie to completion accounts and debt covenants.
- Playbook: Maintain a positions playbook with standard fallbacks and approval levels. Track exceptions and close the loop post-mortem.
Closeout and data hygiene: finish strong
Archive the deal files with index, versions, Q&A, users, and full audit logs. Hash, set retention, direct vendor deletion with a destruction certificate, and let legal holds trump deletion. Bake this flow into the binding confidentiality section and mirror it in the data room instructions to keep compliance and risk in check.
Closing Thoughts
A disciplined HoT Template Pack converts pre-legal chatter into firm commercial intent. It clarifies economics, risk, governance, and the regulatory path while lining up information deliverables insurers and lenders expect. In the UK SME market, with thin resources and tight timetables, standardized HoTs raise close certainty and lower total cost. Keep it simple, assign responsibilities, set realistic longstops, and let the numbers speak.