This article forms part of The Acquisition Success Series, a four-part guide for business owners considering acquisitions, covering strategic fit, pre-Heads testing and deal structuring, formal due diligence, and post-acquisition value realisation.
Once a buyer has decided that a target may be strategically attractive, the next step is not simply to put forward a price and see what happens. The buyer needs to understand enough of the opportunity to make sure the proposed Heads of Terms reflect the commercial reality of the business.
At this stage, the buyer may already have access to a detailed Information Memorandum, financial statements, management information, operational details, customer concentration data, systems information, employee tenure and salary details, and a number of meetings with the vendors. That is not the same as formal due diligence, but it is often enough to form a more considered view of value, risk and structure.
The objective is simple: test enough before signing Heads of Terms to avoid agreeing a price, payment structure or transition arrangement that later proves difficult to justify.
Use pre-Heads testing to shape price, structure and transition
Before Heads of Terms are agreed, the buyer should use the information available to form a practical view of value, risk and transition.
The aim is not to complete formal due diligence at this stage, but to carry out focused, proportionate testing so the buyer can decide which issues should influence valuation, payment structure, transition arrangements and the scope of formal due diligence.
| Area to test before Heads | What the buyer should consider | Possible impact on valuation, structure or transition |
|---|---|---|
| Customer access | Is revenue concentrated in a few customers, and who owns those relationships? | May affect valuation, deferred consideration, customer retention assumptions or seller handover. |
| Contract and revenue quality | Is income recurring, project-based, seasonal, concentrated or one-off? | May affect maintainable earnings, valuation and the level of upfront consideration. |
| Adjusted EBITDA | What is maintainable profit after adjusting for one-off, discretionary or non-commercial items? | May require a revised valuation or make the price subject to confirmation in formal diligence. |
| Owner remuneration | Is current profit overstated because the owner is underpaid, not fully replaced or taking value in another form? | May reduce maintainable earnings and affect valuation. |
| Technical capability | Does expertise sit across the team, or mainly with the seller or a small number of key people? | May require retention planning, seller support or a more cautious structure. |
| Future growth | Is the pipeline supported by credible opportunities, conversion rates, capacity and market demand? | May justify an earn-out rather than paying fully upfront for growth not yet delivered. |
| Management depth | Can the business operate effectively without the current owner’s daily involvement? | May affect transition period, deferred consideration and post-completion support. |
| Working capital | How much cash is needed to trade normally after completion? | May require a clear working capital mechanism or target working capital assumption. |
| Key employees | Who is critical to continuity, and how likely are they to stay? | May require retention arrangements, communication planning or completion conditions. |
| Transition requirements | What customer, operational and management handover is needed after completion? | May need to be reflected in the Heads through a defined seller role, duration and responsibilities. |
This is where pre-Heads testing becomes commercially valuable. It helps the buyer avoid terms that are too generous, too vague or too difficult to renegotiate later.
Once a headline price has been written into Heads of Terms, changing it can become emotionally and commercially difficult, even where later diligence identifies valid concerns. That is why the main issues affecting value, risk and handover should be considered before the Heads are agreed, not only afterwards.
The buyer should be able to say: “Based on what we know so far, these are the terms we are prepared to propose, subject to formal due diligence.” That is a sensible position. What is more dangerous is agreeing terms before understanding the main factors that could affect price, structure and transition.
Better testing leads to better Heads
Heads of Terms should not be treated as a light administrative step before the real work begins. They often set the tone, economics and risk allocation of the transaction.
A well-prepared buyer does not need to prove everything before Heads are signed. However, they should test enough to understand whether the proposed price is reasonable, whether part of the consideration should be deferred, whether an earn-out is appropriate, what working capital assumptions are needed and what transition arrangements should be agreed.
At Randall & Payne, we help business owners and management teams test acquisition opportunities before they commit to Heads of Terms. This includes reviewing the value case, maintainable earnings, early valuation considerations, likely funding requirements, deal structure options and the key risks that should be reflected before price, payment structure and transition terms are agreed.
If you are considering acquiring a business, it is worth testing the opportunity properly before signing Heads of Terms. The earlier the key assumptions are challenged, the better the chance of agreeing terms that support not just a deal, but the right deal.
For more information contact Hari Pillai, Corporate Finance Manager, on 01242 776000 or hari.pillai@randall-payne.co.uk.
Acquisition Success: What to confirm through due diligence before completion