Introduction
Heads of Terms (HOT) sit at the inflection point of any letting agency sale. Once the buyer has made an offer and you have agreed to move forward, the HOT translate that handshake into a structured commercial framework — one that the full Sale and Purchase Agreement (SPA) will later be built upon.
Many sellers treat HOT as a formality, a brief document to sign before the lawyers take over. That is a costly mistake. The terms you agree here, particularly around earn-outs and the definition of Annual Management Fee Income (AMFI), will directly determine how much money you actually receive.
What Are Heads of Terms?
Heads of Terms are a written summary of the principal commercial terms agreed between buyer and seller before the SPA is drafted. They are almost always non-binding as a whole — neither party is legally committed to completing the transaction. However, two specific provisions within them are typically binding:
- Exclusivity — the seller agrees not to approach or entertain other buyers for a defined period
- Confidentiality — both parties agree not to disclose the deal or its terms
The non-binding nature of the rest of the HOT is deliberate. It allows either party to walk away if due diligence reveals something unexpected. However, the commercial terms agreed in the HOT will carry enormous moral and practical weight. Once you have signed, you will find it very difficult to renegotiate the headline numbers without damaging the relationship. Get them right before you sign.
Because the SPA follows the HOT closely, ambiguities or omissions in the HOT tend to be resolved in the buyer’s favour during legal drafting. Your job is to leave nothing ambiguous.
What Must Be In Your Heads of Terms
A well-drafted HOT for a letting agency sale should address every one of the following:
1. Headline AMFI Multiple and Base Figure
The price is typically expressed as a multiple of AMFI. The HOT must state both the multiple and the base AMFI figure being multiplied. If the base figure is disputed later, the entire valuation is in play. Confirm the trailing AMFI figure used (usually the last 12 months), and whether it is calculated at the point of exchange, completion, or a fixed reference date.
See our guide to estate agency valuation for more on how AMFI multiples are determined.
2. Completion Payment
Specify the cash payable on completion — whether this is the full consideration or a tranche. If any element is deferred, state the deferral schedule clearly.
3. Earn-Out Structure
Most letting agency deals include an earn-out, where a portion of the price is paid over 12 to 24 months post-completion, conditional on performance. The HOT must specify:
- The earn-out period (start and end dates)
- Whether the earn-out target is retention of existing AMFI or growth above a base
- The calculation frequency (monthly, quarterly, annually)
- The payment mechanics
Retention-based earn-outs are more common and more favourable for sellers, as you are paid for maintaining what you already have rather than growing from it.
4. The AMFI Definition — The Most Important Term
The definition of AMFI used to calculate the earn-out is the single most commercially significant term in the entire HOT. Buyers and sellers often use the same word — AMFI — while meaning very different things.
The HOT must explicitly state what is excluded from AMFI:
- Buyer group overhead allocations. Post-completion, the buyer may allocate central costs (IT, HR, marketing, compliance) against your branch’s P&L. If these are deducted before AMFI is calculated, your earn-out will be eroded by costs that were never part of your business.
- Gap properties on the same treatment as seller. Properties that fall off the managed portfolio during the earn-out period (“gaps”) may be treated differently by the buyer than by you. The HOT should define how gap properties are treated and whether this treatment mirrors your pre-sale approach.
- Post-completion acquired portfolios merged in. If the buyer acquires another portfolio and merges it into your branch during the earn-out period, this complicates the calculation. New income should not be counted as your retained income; new costs should not be deducted against your base.
Failure to nail this definition in the HOT means your solicitor will be negotiating it under time pressure during SPA drafting — at a point when the buyer has less incentive to compromise.
5. Non-Interference and Transition Period Obligations
The HOT should define what the buyer can and cannot do to the business during the earn-out period that might affect your performance. Common provisions include:
- The buyer cannot make material changes to fee structures without seller consent
- The buyer will not approach seller’s clients directly during the transition period
- The seller will continue managing the business during the earn-out with agreed operational authority
Transition period obligations work both ways. You will typically be expected to remain actively involved in the business and to introduce the buyer’s team to key clients and landlords. Set clear expectations on both sides now.
6. Collar
A collar defines the floor and ceiling of the earn-out. Without one, a dramatic fall in the managed portfolio could mean the earn-out pays nothing; without a ceiling, an exceptional year could cost the buyer far more than anticipated. Collars protect both parties and facilitate clean deal completion.
7. Transaction Structure: Asset Sale vs Share Sale
State clearly whether this is an asset purchase (the buyer acquires the business assets: management contracts, goodwill, client list) or a share purchase (the buyer acquires the company itself). This affects tax treatment, TUPE liability, and the scope of warranties. Most letting agency acquisitions proceed as asset sales, but confirm this explicitly.
8. Due Diligence Scope and Timeline
Agree in outline what the buyer’s due diligence will cover and the timeframe allowed. Standard areas include management agreement review, rent roll, client tenure analysis, landlord concentration, staff contracts, and regulatory compliance. Tight but realistic timeframes prevent the deal from stalling in an extended DD phase.
9. Conditions and Timeframes
Set out any conditions that must be satisfied before exchange of contracts, including:
- Satisfactory completion of management agreement audit
- Financing confirmed by the buyer
- Board approval from the buyer’s parent group (if applicable)
- TUPE consultation completed (if asset sale)
Each condition should have a longstop date. Without these, conditions can become a tool for delay.
10. Exclusivity Period
Standard exclusivity runs 4 to 8 weeks. Longer exclusivity benefits the buyer; shorter benefits the seller. If the buyer requires extended exclusivity, consider whether this is warranted by the complexity of the deal or whether it is simply risk-shifting. Exclusivity beyond eight weeks should require justification.
Negotiation Priorities
Not all terms carry equal weight. Focus your negotiation energy on:
1. The AMFI definition — this is the earn-out. Get it precisely drafted.
2. Transition period obligations — specifically, what operational changes the buyer can make during the earn-out that will affect your income.
3. Exclusivity duration — keep it proportionate to the deal’s complexity.
4. TUPE position — confirm whether staff transfer under TUPE and who bears any associated liability.
After Heads of Terms Are Signed
Once HOT are signed, instruct solicitors immediately. Delay here benefits the buyer, not you. Choose solicitors with direct experience of letting agency transactions — the management agreement assignment process and earn-out calculation schedules require specialist drafting expertise that a generalist commercial solicitor is unlikely to have.
The SPA will expand every term in the HOT into legally binding language. The quality of the HOT determines how much scope the buyer’s solicitors have to reframe those terms in drafting. A precise, well-considered HOT produces a cleaner SPA negotiation and a faster path to completion.
Next Steps
If you are approaching a sale and have not yet had your business valued, read our guide on estate agency valuation to understand how AMFI multiples are calculated before you enter HOT negotiations.
For a full overview of the transaction process, see how to sell your estate agency.
The Acquisitions Group advises on the sale of estate and letting agencies across the UK. If you would like a confidential discussion about the value of your business, contact us today.