From interest to deal: Valuation, structure and heads of terms

An indicative valuation should be grounded on clearly defined earnings or annual recurring revenue. This means normalising EBITDA by removing one-off items, adjusting for run-rate costs and revenues, and ensuring that the earnings figure reflects the genuine ongoing performance of the business.

Valuation multiples should be triangulated across sector comparables, precedent transactions and the target's specific growth and quality profile. A business with high recurring revenue, low customer concentration and strong management depth will command a premium over one with project-based income and key-person dependency.

Beyond the headline multiple, model the cash and capital requirements carefully. Working capital seasonality, maintenance capital expenditure and the investment required to sustain the growth trajectory all affect the true economic cost of the acquisition.

Finally, scenario analysis is essential. Sensitise your valuation to customer churn, margin pressure, cost inflation and hiring assumptions. Understanding the downside case is as important as believing in the upside.

The choice of deal structure has profound implications for tax, liability exposure and post-deal complexity. Share purchases are the most common form for UK private transactions, but asset purchases offer advantages in certain circumstances — particularly where the buyer wishes to cherry-pick specific assets or avoid historic liabilities, most notably tax.

Cash-free, debt-free transactions with a normalised working capital adjustment are standard, but the definitions matter enormously. What constitutes 'net debt'? How is 'normal' working capital measured? These seemingly technical points have material commercial implications and should be addressed at the heads of terms stage, not left to SPA negotiation.

Deferred consideration and earn-outs can bridge valuation gaps, but they require careful design. Clear KPIs, unambiguous definitions, specified measurement mechanics and agreed accounting policies are essential. Poorly designed earn-outs are a frequent source of post-completion disputes.

Management equity and incentive arrangements should also be considered at this stage. Retaining key talent is often critical to value realisation, and early alignment on incentive structures avoids awkward negotiations later.

Although largely non-binding, heads of terms are pivotal in shaping the trajectory of a transaction. They establish the commercial framework within which all subsequent negotiations take place and, once agreed, create significant psychological and practical momentum.

Well-drafted heads of terms should address the price range and structure, including any earn-out parameters, as well as the pricing mechanism, whether a locked-box or completion accounts approach is used. They should also set out the exclusivity period and process timetable, along with access and information rights during due diligence.

In addition, they should cover key legal concepts such as warranties, indemnities, caps, baskets and survival periods, together with any financing conditions and regulatory approvals.

Several areas consistently generate friction between buyer and seller and merit particular attention at the heads of terms stage. Working capital, specifically the definition of 'normal' and the treatment of seasonal fluctuations, is a regular source of dispute. Under a locked-box mechanism, the scope of permitted leakage must be tightly defined. Earn-out parameters require clarity on the buyer's control rights over the relevant business during the earn-out period, the treatment of exceptional items and the dispute resolution mechanism.