In most M&A transactions, a buyer will present a seller with a term sheet, or letter of intent, to offer to acquire their business. This document sets forth the substantive terms of a proposed transaction. Most of the provisions are non-binding, however, it is still critical that it is reviewed and negotiated carefully before execution. Buyers and sellers will invest a significant amount of time and resources in a transaction, so a proper term sheet helps to ensure that the parties are aligned before moving forward.
A term sheet typically covers structural, financial, process, and legal matters such as:
- Deal Structure – Asset vs. Equity
- Purchase Price and Terms of Payment – Amount, Deferred Payment, Seller Financing
- Assumption and/or Exclusion of Liabilities – Payables or other obligations
- Due Diligence – Scope and Process
- Timing – Schedule of Events, from signing to closing
- Closing Requirements – Conditions Precedent, required approvals and consents
- Employment Matters – Retention or Termination, of owner and/or other key employees
- Post-Closing Considerations – Working Capital Adjustment and Business Transition Matters
The term sheet provides a road map for the parties as well as their counsel and advisors moving forward through this process. It will form the basis for drafting definitive documentation. If the parties disagree on certain terms, they will look back to the term sheet for guidance. This will help alleviate potential misunderstandings or sources of conflict.
That is not say that the term sheet is written in stone. Situations change during the course of due diligence and re-negotiation may be necessary in those instances. In such a case, it is appropriate to revisit the term sheet and revise accordingly. Absent such circumstances, however, it is considered bad form to re-trade terms previously agreed-upon in the term sheet as it may sour the relationship between buyer and seller or even derail the transaction.
While most terms are non-binding, there are certain provisions which are binding upon the parties such as:
- Exclusivity – Buyer has the exclusive right to consummate a transaction for a set period of time
- Confidentiality – Agreement not to disclose confidential information
- Non-Solicitation – Seller will not seek or entertain other offers
- Governing Law – Which State law governs with respect to interpretation of the letter of intent
The term sheet is the critical first step for a transaction and will set the path going forward. Before signing, a seller should consult with counsel and financial/strategic advisors to confirm that it accurately reflects their understanding of the pending transaction and properly accounts for all the material deal points.
For assistance reviewing your term sheet, please reach out to request a consultation or visit Mike’s bio for his contact information to reach out to him directly.
