Heads of terms document the commercial framework that both parties have agreed before solicitors are instructed. In a franchise territory sale they serve a second purpose: they force the parties to confront the franchisor consent condition early, when there is still time to manage it. Sellers who leave that conversation until solicitor stage routinely discover that a condition they treated as procedural is, in practice, one that can end the deal.
This guide covers what heads of terms are, what every franchise territory heads of terms must contain, and how to negotiate the franchisor consent condition — the clause that most often determines whether the deal completes.
What Heads of Terms Are
Heads of terms are a written summary of the commercial deal agreed between buyer and seller. They are not the sale and purchase agreement. They do not transfer the business. They establish the framework — price, structure, conditions, timelines — within which solicitors then draft binding documents.
Most heads of terms are expressed as non-binding, with two standard exceptions: the exclusivity period and the confidentiality obligation. Both of those bind from signing. Everything else is a commercial framework rather than a legal commitment.
This matters in franchise territory sales because the heads of terms will be in place while the franchisor considers whether to approve the buyer. That period — typically four to eight weeks — is when the commercial framework is tested. If the heads of terms are silent on what happens if the franchisor refuses consent, there is no agreed framework to fall back on when it matters most.
The sale and purchase agreement follows the heads of terms and converts the agreed commercial framework into enforceable legal terms. Anything left vague in the heads of terms will be resolved, one way or another, in the sale agreement — usually by the party whose solicitors drafted it.
What a Franchise Territory Heads of Terms Must Cover
Headline Price and EBITDA Basis
The headline price should be stated alongside the earnings basis on which it was agreed. If the price is expressed as a multiple of EBITDA, the agreed EBITDA figure must be specified. This prevents a later dispute about whether the agreed price applies to the management accounts figure, the adjusted figure, or a different calculation entirely.
Completion Payment
The completion payment — the cash paid on the day the deal completes — must be stated separately from the headline price wherever part of the consideration is deferred. Sellers should know from the heads of terms what they will receive on completion day, not only what they may receive in total.
Earn-Out Terms
Where an earn-out is proposed, the heads of terms should specify the metric, the performance period, the target, and the payment schedule. Leaving earn-out mechanics to the sale agreement drafting stage means those mechanics are written by the buyer’s solicitors without an agreed framework. Earn-out provisions negotiated at heads of terms are consistently more protective for sellers than those negotiated at sale agreement stage.
Vendor Loan Terms
If the buyer has requested a vendor loan, the principal, interest rate, repayment schedule, and any proposed security should be agreed at heads of terms. A vendor loan accepted in principle at offer stage but left unspecified in the heads of terms will be defined in full by whoever drafts the sale agreement.
Transaction Structure: Asset Sale or Share Sale
Asset sales and share sales have materially different tax consequences for sellers. An asset sale requires the franchise agreement to be formally assigned to the buyer — the buyer acquires the assets and takes on a new franchise agreement. A share sale transfers the entity that holds the franchise agreement; the agreement continues in the company’s name under new ownership. The heads of terms should confirm which structure applies. Sellers should not agree structure without taking tax advice first — Business Asset Disposal Relief eligibility varies significantly between the two.
The Franchisor Consent Condition: The Critical Term
Why This Condition Is Different
Every other condition in a franchise territory heads of terms is within the control of the buyer, the seller, or both. The franchisor consent condition is controlled by a third party who is not a party to the deal.
The franchisor can withhold consent. They can approve the deal subject to conditions the buyer cannot meet. They can take longer than the agreed long-stop date to complete their assessment. Their decision is final. This is not a theoretical risk — it is a feature of every franchise territory sale, and the heads of terms is the document that should address it directly.
What the Franchisor Consent Condition Must Include
Written consent required. The condition must specify that the franchisor’s consent must be in writing. Verbal indications or informal approvals do not satisfy this condition and should not be treated as satisfying it.
Maximum timeframe: four to eight weeks. The heads of terms should set a maximum timeframe within which the franchisor is expected to respond. Four to eight weeks is the realistic range for most networks. Some franchisors have formalised approval processes at the faster end; others require multiple stages of assessment and take longer. Sellers should ask the franchisor directly what their process involves before agreeing a timeframe.
Long-stop date. The long-stop date is the date by which the franchisor consent condition must be satisfied before either party can elect to walk away. It should be aligned with the maximum timeframe — setting a long-stop of six weeks when the franchisor’s process takes eight is a common mistake. If the long-stop expires before consent is obtained, either party can typically terminate without penalty. The heads of terms must make this explicit.
What happens on refusal — deposit return and cost allocation. If the franchisor refuses consent, who bears the costs? Who returns any deposit? A heads of terms that is silent on this point leaves both parties exposed to a dispute at precisely the moment when the deal has already failed. The heads of terms should confirm that the deposit is returned in full if the franchisor refuses consent, and that each party bears their own costs in that event.
Negotiating the Franchisor Consent Condition
Seek Pre-Approval Before Exclusivity
The most effective way to manage franchisor consent risk is to introduce the proposed buyer to the franchisor before exclusivity is granted. An informal indication from the franchisor that the buyer meets their criteria does not replace formal written consent, but it substantially reduces the risk that the consent condition fails.
Sellers who grant exclusivity before any franchisor contact are locking themselves out of the market for a buyer who may not be approvable. That is a costly position if it turns out the franchisor has reservations.
Set a Realistic Maximum Timeframe
The maximum timeframe in the heads of terms should match the franchisor’s actual process, not a number that suits the buyer’s preferred timeline. Agreeing a four-week timeframe for a franchisor whose process routinely takes eight weeks creates a situation where the heads of terms are effectively unworkable from day one.
Define Consequences of Refusal
If the franchisor refuses consent, the exclusivity period should terminate automatically. The seller should be free to re-market without delay. This should be stated explicitly in the heads of terms rather than left to negotiation at the point of failure.
Other Terms, Exclusivity, and Transfer Fee
Other conditions in the heads of terms should each have a specified timeframe for satisfaction. Conditions without timeframes become indefinite obligations.
Exclusivity of two to four weeks from signed heads of terms is appropriate for franchise territory sales where the franchisor consent process runs in parallel. The exclusivity period protects the buyer while due diligence is commissioned; it should not be long enough to lock the seller out of the market during a prolonged or stalled consent process.
Transfer fee acknowledgement — commonly five to ten percent of the sale price — should be noted in the heads of terms so both parties understand the net proceeds position before the sale agreement is prepared.
After Heads of Terms Are Signed
Instruct solicitors immediately. Franchise territory sales require solicitors with specialist knowledge in franchise law: the assignment documentation for an asset sale, the disclosure process for a share sale, and the TUPE obligations relating to staff all require experience that a general commercial solicitor may not have. The heads of terms framework is only as useful as the legal documents that implement it.
For an overview of the full process see how to sell a franchise business in the UK. For detail on how the territory was valued before reaching heads of terms stage see franchise territory valuation.
Frequently Asked Questions
Are heads of terms binding in a franchise territory sale?
Most heads of terms are non-binding, with two exceptions: the exclusivity period and the confidentiality obligation bind from signing. Everything else is a commercial framework. This is why getting the framework right matters — the sale agreement converts it into enforceable terms, and vague frameworks produce buyer-favourable sale agreements.
What happens if the franchisor takes longer than the long-stop date?
If the franchisor has not confirmed written consent by the long-stop date, either party can typically elect to terminate. The heads of terms should confirm this explicitly and should specify that the deposit is returned in full and each party bears their own costs in that event.
Should I tell the franchisor about the sale before heads of terms are signed?
Yes — at minimum, an informal introduction of the proposed buyer before exclusivity is granted is strongly advisable. It allows the franchisor to indicate whether the buyer meets their criteria before you lock yourself out of the market during an exclusivity period. It does not replace formal written consent, but it materially reduces the risk of the consent condition failing.
What is the transfer fee and who pays it?
The franchise transfer fee is paid to the franchisor as a condition of granting consent to the sale. It is typically five to ten percent of the sale price and is borne by the seller out of the sale proceeds. It is an allowable deduction against the capital gains calculation. Sellers should confirm the exact transfer fee with their franchisor at the outset — it is a material cost that affects net proceeds.
What specialist expertise do franchise solicitors have that general solicitors do not?
Franchise solicitors understand franchise agreement assignment, the consent process, network-specific standard clauses, and the TUPE obligations that arise in a territory sale. They are also familiar with the disclosure obligations specific to franchised businesses. Using a general commercial solicitor for a franchise territory sale significantly increases the risk of missing terms that an experienced franchise solicitor would identify as standard.
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 experienced in franchise law before entering into a heads of terms.