M&A Glossary
Term sheet: what it contains and what binds
A term sheet sets out the main terms of a transaction before lawyers start drafting the agreement. As a rule it is not binding on the commercial terms, but it does bind on a few points that are easy to overlook, and those are the reason to read it carefully.
What it covers
Contents
Six things it has to settle
01
Subject and price
What is being bought, shares or assets, plus enterprise value and the mechanism for reaching the price for the shares.
02
Payment structure
How much at closing, how much deferred, whether there is an earn-out and escrow, and on what terms.
03
Conditions precedent
What must happen before closing: consents, financing, review findings, merger clearance.
04
Exclusivity
Whether the seller agrees not to talk to others, and for how long. This provision is binding.
05
The seller afterwards
Transition period, non-compete, any continued involvement and how it is paid.
06
Timetable
Dates for the review, signing and closing. Without them a process runs on indefinitely.
What binds, even though the document is non-binding
The commercial provisions are normally non-binding: price, structure, conditions. Confidentiality, exclusivity, cost allocation and governing law are binding. That distinction is often a single line at the end of the document, and it is the line to read most carefully.
Signing a term sheet with exclusivity means several weeks without talking to other buyers. That is a real obligation, even if the rest of the document is a statement of intent.
Frequently asked
Questions about term sheets.
How does a term sheet differ from a letter of intent?
In practice, very little. A letter of intent tends to be more narrative, a term sheet more itemised and more specific on financial points. Both do the same job: recording what the parties agreed before the review starts.
Can you use a template?
A template is a starting point, but copied unchanged it usually does harm. The price mechanism, the net debt definition and the exclusivity terms depend on the specific company, and those are exactly the points that decide the outcome later.
What is hardest to negotiate?
Not the price, but the mechanism for reaching it: the definition of net debt, the target working capital level and the earn-out terms. Those three can move the payout more than a point on the multiple.
See also
- M&A glossary - 72 terms used in transactions
- How we run a company sale
- How we work and how we charge