Heads of terms matter more in franchise territory sales than in most other business sales. The reason is structural: a franchise deal involves three parties — seller, buyer, and franchisor — and the terms you agree at heads of terms stage will govern how all three interact through due diligence, franchisor consent, and completion.
Most heads of terms documents are expressed as non-binding. In franchise sales, this creates a specific danger: sellers and buyers agree a framework that leaves key points for the sale agreement, only to discover at solicitor stage that those points are not negotiable once commercial momentum has built. The eight topics below are the ones where getting it right at heads of terms protects both parties. Leaving them vague does not create flexibility — it creates a mechanism that favours whichever party’s solicitor drafts the detail.
1. Total Consideration and Structure
The heads of terms must specify the total consideration and how it is structured — not just the headline number.
A deal structured as £400,000 with an earn-out component is very different from £400,000 all on completion, and the heads of terms should say which it is, how the split works, and what the earn-out element is contingent on.
“Earn-out to be agreed” is not a placeholder — it is a concession. If the heads of terms do not define the earn-out mechanism, whoever drafts the sale agreement (almost always the buyer’s solicitors) will define it. The seller then negotiates from a draft written against their interests rather than from an agreed framework.
The consideration structure should state: the completion payment, the earn-out amount, the performance period, the reference metric, and the payment schedule. If vendor loan finance is involved, the principal, interest rate, repayment schedule, and security arrangements should also be confirmed at heads of terms stage.
2. Franchisor Consent as a Condition Precedent
Franchisor consent is not a formality — it is a condition that can fail — and the heads of terms is where this risk should be addressed, not the sale agreement.
Brief the franchisor before the heads of terms are signed, not after. Franchisors can and do withhold consent. Some impose minimum criteria on buyers. Some require interviews, training programmes, or proof of liquidity that take weeks to arrange. Discovering at solicitor stage that the proposed buyer does not meet the franchisor’s criteria — after months of preparation — is expensive and avoidable.
The heads of terms should include:
Long-stop date allowing 8–12 weeks for consent. Franchisor consent processes vary significantly between networks. A long-stop date of four to six weeks is routinely agreed between parties and routinely inadequate. Eight to twelve weeks is realistic. If the long-stop date expires before consent is obtained, either party can typically elect to walk away — so a realistic long-stop date protects the deal as much as it constrains it.
What happens if consent is withheld. The heads of terms should confirm whether deposit money is refundable if the franchisor refuses consent, and whether either party bears costs in that event. A heads of terms that is silent on this point leaves both parties exposed to a dispute about costs if the deal fails for reasons outside their control.
3. Earn-Out Mechanism
If the deal includes an earn-out, every substantive element of the mechanism must be agreed at heads of terms stage.
The six elements that cannot be left for the sale agreement are:
The metric. Revenue, gross profit, EBITDA, or another defined figure. Revenue is verifiable but can be inflated by aggressive pricing that damages client retention. Profit metrics require an agreed accounting policy to have any meaning.
The performance period. Typically 12 or 24 months post-completion. The longer the period, the more dependent the seller is on the buyer’s operational decisions.
The target. A specific number, not a range. “Subject to business performing” is not a target.
The payment schedule. Monthly, quarterly, or annually in arrears; the payment date; what happens to amounts in dispute.
Non-interference protections. The buyer controls the business during the earn-out period. Without contractual protection, the buyer can make decisions that legally comply with the agreement but materially reduce earn-out performance: excessive cost allocation, pricing changes, territory management decisions. Heads of terms should confirm that non-interference obligations will be included in the sale agreement and summarise their scope.
Floor and ceiling. A floor on earn-out payment (the minimum regardless of performance) and a ceiling (the maximum) benefit both parties by removing tail-risk from the calculation. If there is no floor, the seller bears the entire downside of any post-completion disruption.
Earn-out provisions negotiated at sale agreement stage, without a heads of terms framework, routinely end up shorter on non-interference protections and more buyer-favourable on targets than provisions agreed at heads of terms.
4. Asset Sale or Share Sale: Decide at Heads of Terms
The question of whether the deal proceeds as an asset sale or a share sale affects stamp duty, tax treatment, liability allocation, and — critically — Business Asset Disposal Relief eligibility. It must be resolved at heads of terms stage.
Seller preference is typically share sale. Business Asset Disposal Relief (BADR), which reduces Capital Gains Tax to 10% on qualifying business disposals, requires a share sale in most franchised business structures. An asset sale will not qualify. Sellers must not agree to an asset sale structure before confirming BADR eligibility with their accountant. Locking in an asset sale structure before taking that advice is one of the most costly mistakes a seller can make.
Buyer preference is typically asset sale. Asset sales allow the buyer to take specific assets and leave specific liabilities behind. They also avoid inheriting the company’s corporate history. A buyer who insists on an asset sale at heads of terms stage should be understood as a buyer who has already taken tax advice and is comfortable with the structure.
The practical consequence of delay. If the heads of terms do not specify the structure, the sale agreement will need to address it — by which point the seller will have incurred legal costs, the deal will have commercial momentum, and reversing the structure will require renegotiation. Confirm asset versus share at heads of terms stage, not at solicitor stage.
5. Non-Compete and Non-Solicitation
Sellers and buyers routinely agree restrictive covenants at heads of terms without thinking through whether the proposed terms will be enforceable, or whether they interact with the franchisor’s own restrictions.
Standard terms for franchise territory sales. Non-compete periods of two to four years are typical, covering the franchised territory and adjacent areas where the seller might reasonably compete. Non-solicitation of clients and staff should be specified separately — a non-solicitation obligation survives even if a non-compete is found unenforceable. The activity restricted should be defined: is the seller prohibited from operating any estate or letting agency business, or only from operating within the specific franchise network?
Interaction with franchisor restrictions. Many franchise agreements include post-termination restrictions that prevent former franchisees from operating competing businesses within the territory for a defined period. These may be broader or narrower than the restrictions in the sale agreement, or may define the restricted activity differently. A seller who agrees a two-year non-compete in their sale agreement without checking the franchisor’s post-termination restrictions may find they are bound for longer than they expected — or by a different definition of the restricted activity.
The heads of terms should state the duration, geographic scope, and activity restricted, and should note explicitly that these will be reviewed alongside the seller’s obligations under the franchise agreement.
6. Transition Period
A handover period of one to three months is standard in franchise territory sales. During this period the seller typically assists the buyer with client introductions, staff management, and franchisor relationship continuity.
If the deal includes an earn-out that requires the seller’s continued engagement beyond a standard handover period, the obligations must be defined at heads of terms. An underdefined earn-out engagement creates disputes: how many days per week is the seller required to be available? What decisions require their input? Who bears costs associated with the transition? Is the seller’s continued engagement a condition of earn-out payment or a separate obligation?
Heads of terms should confirm the transition period length, the nature of the seller’s obligations during that period, and — if earn-out engagement extends the period — the specific obligations attached to that extended involvement.
7. Exclusivity
Standard exclusivity periods in franchise territory sales are four to six weeks from signed heads of terms.
Exclusivity without a good-faith progress requirement is illusory. A buyer who signs heads of terms and then delays commissioning due diligence, or who fails to submit a franchisor application within the first two weeks, is not proceeding in good faith — but without a progress requirement in the heads of terms, the seller has no mechanism to call this out short of threatening to terminate exclusivity.
The heads of terms should include an obligation on the buyer to submit a formal franchisor application within an agreed period (typically two weeks), provide initial information for basic due diligence, and confirm professional adviser appointments. Exclusivity should lapse automatically if these steps are not taken, not require formal termination action by the seller.
A buyer who cannot meet these basic progress milestones during exclusivity is unlikely to complete a transaction within the franchisor’s consent window. Identifying this early — through a well-drafted exclusivity clause — is far less costly than discovering it at solicitor stage.
8. Confidentiality
Confidentiality obligations apply from first contact in a properly run sale process. The heads of terms should confirm the scope of the confidentiality obligation and, critically, whether it is consistent with the seller’s obligations under the franchise agreement.
Some franchise agreements require the franchisee to disclose any sale discussions to the franchisor in a specific form. Agreeing confidentiality with a buyer that inadvertently prohibits the seller from complying with their franchise agreement creates a conflict the seller cannot resolve without breaching one obligation or the other. Heads of terms confidentiality provisions should explicitly carve out disclosures required by the franchise agreement and disclosures made to professional advisers.
When to Instruct a Solicitor
Before the heads of terms are signed. This is the answer in franchise sales as in all business sales — and it matters more here because the heads of terms framework governs how the franchisor consent condition, the earn-out mechanism, and the asset-versus-share structure will be documented.
A solicitor experienced in franchise business sales will identify the terms that cannot safely be left vague. They will know what a realistic franchisor consent long-stop looks like, how non-interference obligations should be drafted, and which terms the buyer’s solicitors will attempt to improve in their favour at sale agreement stage.
For a full overview of the sale process, see how to sell a franchise business in the UK. For detail on the key clauses in the eventual sale agreement, see the franchise sale agreement: key clauses explained.
Frequently Asked Questions
Can I sign heads of terms without a solicitor in a franchise sale?
Technically yes, but it is inadvisable. In franchise territory sales the heads of terms framework governs the earn-out mechanism, the franchisor consent condition, and the asset-versus-share structure. All three of these have significant legal and tax consequences. A solicitor involved at heads of terms stage costs a fraction of what it costs to unwind a poorly drafted framework at sale agreement stage.
How long should the exclusivity period be?
Four to six weeks is standard. The exclusivity period should be long enough to allow the buyer to submit a franchisor application and commission basic due diligence, but not so long that the seller is locked out of other buyers if the deal stalls. A good-faith progress requirement — specific milestones the buyer must hit within the exclusivity period — is more important than the length of the exclusivity itself.
What is the long-stop date for franchisor consent?
Eight to twelve weeks from signed heads of terms is realistic in most franchise networks. Some networks are faster; some are significantly slower. Sellers should ask the franchisor directly what their consent process involves before agreeing a long-stop date. A long-stop that expires before the franchisor has completed their process terminates the deal through no fault of either party.
Does it matter whether we agree asset sale or share sale at heads of terms?
Yes — significantly. BADR eligibility depends on the deal structure, and sellers who agree to an asset sale before taking tax advice may forfeit significant tax savings. The asset-versus-share question must be resolved at heads of terms stage and should be treated as a major negotiating point, not an administrative detail.
What should non-interference protections in an earn-out cover?
At minimum: a prohibition on excessive cost allocation to the business during the earn-out period, restrictions on material pricing changes without seller consent, and an obligation to maintain the business in its current operational form absent agreed changes. The specific protections depend on the business model and earn-out metric — a revenue-based earn-out needs different protections to a profit-based one.
Acquisitions Group acts as business transfer agent for estate agencies, letting agencies, and dental practices across the UK. We do not provide legal advice. All sellers should instruct a qualified solicitor before entering into a heads of terms.