M&A Basics | The Term Sheet
A term sheet serves as the launchpad for negotiations, providing a focal point for both parties to zero in on the critical aspects of a transaction. Its primary mission is to pave the way for a comprehensive letter of intent (LOI) or purchase agreement by aligning the key elements.
In essence, the term sheet is a concise yet potent document, distilled into a bullet-point format, spotlighting pivotal transaction details. This includes elements like the sale price, earnest money deposit, down payment, financing terms, due diligence timeline, training agreements, non-compete clauses, and other fundamental terms.
We’ve witnessed numerous scenarios where parties invested countless hours and substantial attorney fees, only to realize that they hadn’t firmly established the transaction’s basic framework. A term sheet can be as straightforward as a single page, encapsulating your consensus on these fundamental terms.
Think of the term sheet as a discussion tool, allowing you to construct the deal’s foundational elements without the burden of crafting the extensive legal language needed for documentation. Once you’ve reached an accord through the term sheet, you can seamlessly transition to crafting a letter of intent or a comprehensive purchase agreement.
Here are the pivotal transaction basics to agree upon:
- Selling price
- Earnest money deposit (if applicable)
- Down payment
- Holdback provisions (if applicable)
- Seller note details (amortization period, interest rate)
- Due diligence duration
- Training period
- Non-compete stipulations
- Any contingencies
It’s essential to avoid the common pitfall of involving an attorney prematurely. Engaging legal counsel is unnecessary until both parties are in alignment on these core elements. In cases involving private equity groups or sophisticated corporate buyers, a term sheet might not be essential, as the buyer often initiates the process by presenting a letter of intent.