If you are selling your business, or buying one, the Commercial Court’s recent decision in Hoffman v Finalto [2026] EWHC 921 (Comm) is worth reading. Yes, it was a multi-million pound fintech deal between a private equity buyer and management. But the two points the court decided come up on lots of SME deals I work on, and getting them wrong costs SME sellers and buyers real money.
The two points are simple:
- A heads of terms or term sheet that says it is binding will be treated as binding, even if a longer agreement was meant to follow.
- Warranties given by a seller can sometimes be treated as representations as well, which exposes the seller to a much bigger damages bill than they thought they were signing up to.
Both come down to drafting. Both are avoidable. Let me explain.
What happened in Hoffman v Finalto
The buyer (a private equity vehicle) bought a fintech business. As part of the deal, the CEO and COO were to receive equity in a new holding company. The commercial terms of that equity were set out in an “equity term sheet”. Long-form documents to put it all in place were meant to follow. They never did. The buyer later told its lawyers to stop work and then dismissed the management team without ever issuing the equity.
The CEO and COO sued. The buyer’s defence was that the term sheet was just a starting point. Until the long-form documents were signed, there was no binding obligation to issue any equity at all.
The judge disagreed, and that is the part that should change how SME owners read every term sheet, letter of intent or heads of terms they sign.
Point one: heads of terms that say they are binding will be binding
The term sheet contained a “legal effect” clause that said the document was “legally binding on the parties, subject to a definitive agreement”.
The buyer said this meant the term sheet only became binding when a definitive agreement was signed.
The judge said the natural reading was the opposite: the term sheet was binding now, and would be replaced by the definitive agreement when one was signed. If the buyer’s reading were right, the legal effect clause would mean nothing. The obligatory wording elsewhere in the term sheet (“the parties shall…”) and the obligation to negotiate in good faith reinforced the same conclusion.
When the buyer instructed its lawyers to stop work and denied that the term sheet was binding, that was a repudiatory breach. The management team was entitled to damages.
Why this matters on an SME deal. Heads of terms get signed at the kitchen table, in pubs, by email, often without lawyers. They are routinely treated as if they are not really legal documents. Sometimes they are not. But sometimes they are, and the test is what the document actually says, not what the parties think it means.
Three things to look for on any heads of terms or term sheet you are about to sign:
- A “legal effect” or “binding nature” clause. Read it. If it says the document is binding, it is binding. If it says only certain parts are binding (commonly the exclusivity, confidentiality and costs provisions), check which parts.
- The presence of “subject to contract” wording. That short phrase, properly used, keeps the document non-binding. Without it, you are exposed.
- Mandatory language in the body. Words like “the Buyer will pay” or “the Seller shall transfer” tend to push a document towards binding force, regardless of the heading on the page.
If you do not want a heads of terms to bind you, say so on the front of the document, in plain English, in bold. “Subject to contract. Not legally binding except in respect of clauses X, Y and Z.” If you do want some commercial points locked in (and on most deals, exclusivity is one), set those out separately and clearly.
The other side of this is that buyers cannot just walk away from a binding term sheet because the deal looks less attractive on second viewing. Once you have signed something with binding commercial terms, you are committed to those terms. Dropping out, or pretending the document was always non-binding, can land you with a damages claim.
Point two: warranties can be representations as well
The second point will be familiar to anyone who has been through an SPA negotiation. The seller is asked to give warranties about the business. In a share sale, those usually appear in the SPA itself or in a separate management warranty deed.
Why does the warranty/representation distinction matter?
- Damages for breach of warranty put the buyer in the position they would have been in if the warranty had been true. So if the seller warrants the company has £100,000 of cash, and it actually has £40,000, the buyer’s loss is roughly the £60,000 shortfall.
- Damages for misrepresentation can put the buyer in the position they would have been in if the misrepresentation had not been made at all. Often, that means rescission of the deal, or damages calculated on the basis that the buyer would never have bought the business in the first place. The numbers can be many multiples of the warranty measure.
The general rule, established in Sycamore Bidco Ltd v Breslin [2012] EWHC 3443 (Ch) and Idemitsu Kosan Co Ltd v Sumitomo Corp [2016] EWHC 1909 (Comm), is that a warranty is just a warranty. It does not, on its own, also count as a representation. That is the seller’s protection.
Hoffman v Finalto identifies four reasons why that default protection can fall away:
One: the nature of the statements. If the seller is giving the buyer information that the buyer cannot easily find out for themselves, the statements look like the kind of thing a buyer relies on rather than the kind of thing the buyer takes as a contractual promise.
Two: drafts circulated before signing. If the buyer saw the substance of the warranties as drafts before the documents were signed, that supports an inference that the buyer was being given information to rely on, not just contractual promises crystallising at the moment of signing.
Three: signing order. If the management warranty deed is signed before the SPA (a very common signing protocol), the warranties are doing something between the two signings. That something looks like inducing the buyer to complete.
Four: the contract’s own wording. Critically, the management warranty deed in this case had a clause excluding liability for non-fraudulent misrepresentation. That clause is in lots of warranty deeds, I see. The judge said: if the document does not contain any representations, why exclude liability for non-fraudulent misrepresentation made in it? The clause itself implied there were representations.
In the end, the buyer’s claim still failed because the alleged representations were not shown to be untrue or fraudulent. But the doctrinal analysis is now law, and it will be relied on by buyers in future deals.
Why this matters when selling your small business. It means the careful drafting work in your SPA and warranty schedule actually has to be done. Standard precedents that contain a non-fraudulent misrepresentation exclusion may now hurt sellers more than they help.
If you are selling, your protection comes from three things working together:
- A clear statement in the SPA or warranty deed that the warranties are warranties only and are not given as representations.
- A non-reliance clause: the buyer acknowledges they have not relied on any statement other than the warranties expressly set out, and have done their own due diligence.
- An entire agreement clause that pulls all pre-contractual discussions inside the four corners of the document.
If your draft deal documents include all three, you are in the Sycamore line and probably safe. If they do not, you may be in Hoffman territory, with the buyer able to argue your warranties were also representations.
If you are buying, the same drafting helps you understand what you are giving up. If a buyer-friendly draft has been turned into a seller-friendly final by removing reliance and the misrepresentation language, you have lost protection you may not realise you have lost.
Five practical takeaways
One: treat heads of terms as a real legal document. Because they can be. Read the legal effect clause before you sign. If you do not want to be bound, say so clearly. “Subject to contract” is the right form of words.
Two: do not include obligations in a heads of terms you are not prepared to perform. If the heads say you will pay £X by Y, you may be on the hook for it, regardless of whether the long-form is signed.
Three: walking away from a binding heads of terms is not free. Telling your lawyers to stop and denying the document was ever binding is the worst possible position. If you need out, look at the termination provisions and take advice before pulling the plug.
Four: do not assume warranties cannot become representations. They usually do not, but the wrong drafting choices can change that. Look hard at any clause that excludes liability for non-fraudulent misrepresentation, and ask whether the document also includes proper non-reliance and entire agreement wording.
Five: signing protocol matters. If you are signing a management warranty deed before the SPA, ask why, and what protection you have for the gap.
Six: get me involved earlier. Like, well before heads of terms – ideally before you even list your business for sale.
The bigger picture
This was a high-value, complex deal. The principles it applies are old and the same ones that apply to a £1.5 million share sale of a Leicester engineering company or a £4 million asset sale of a Midlands recruitment firm. The risk is the same. The drafting fixes are the same.
Most SME deals get done on lightly negotiated heads of terms followed by buyer-led SPA drafts marked up briefly by the seller’s solicitor. That is how cases like Hoffman happen. Slow down at the heads of terms stage. Get the legal effect clause right. Insist on proper non-reliance and entire agreement provisions in the SPA. Look hard at the misrepresentation exclusion in any warranty deed.
The full judgment is reported as Hoffman & Anor v Finalto Group Ltd & Anor [2026] EWHC 921 (Comm). The Sycamore line of authority discussed above is at Sycamore Bidco Ltd v Breslin & Anor [2012] EWHC 3443 (Ch).
If you are selling or buying a business and want a practical, plain English review of your heads of terms or draft sale documents before you sign, please get in touch.
Steven Mather is a solicitor specialising in business sales and acquisitions for SME owner-managers. This article is for general information and does not constitute legal advice.