How to Draft an M&A Term Sheet (Benefits Included)

A business sale is one of the most crucial aspects of your entrepreneurial journey. When selling your business, you usually deal with several documents that contribute to a successful sale.

The M&A term sheet is one of the earliest documents in a business sale, and it can be difficult to navigate without the special help of M&A attorneys and other experts.

We can help you find the right M&A attorneys to negotiate deal sheets with your potential buyers before you settle on the most favorable one.

Consult with us at Exitwise today.

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What is a Term Sheet in M&A?

An M&A term sheet is typically a preliminary document that outlines the key terms and conditions of a proposed M&A transaction.

The document may also be called an M&A deal sheet and is usually written as a list of bullet points.

It is one of the early documents drafted by the buy side in the M&A process and usually features your signature as the seller and that of the prospective buyer.

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Term Sheet vs. LOI vs. MoU

Depending on the jurisdiction and the nature of the deal, the term sheet, letter of intent, and MoU may be used interchangeably in most cases.

But here's how the three early-stage M&A documents compare:

Aspect

Term Sheet

Letter of Intent (LOI)

Memorandum of Understanding (MoU)

Purpose

To help you and the buyer understand the key terms of the deal before investing time and other resources into due diligence and final negotiations.

To express the seriousness and genuine interest of the buyer in buying your company or business.

To outline the key terms and details of an M&A understanding, especially showing each party's responsibilities and requirements.

Binding Nature

Generally not legally binding but may include binding clauses such as exclusivity.

Typically not binding but may contain some binding clauses.

Usually non-binding but may have binding clauses, depending on the intention of the parties involved.

Detail Level

Typically contains fewer details, mainly the deal’s terms and conditions.

Contains content such as deal structure, closing conditions, and confidentiality agreement.

Focuses on the objectives, duties, responsibilities, and general rules governing a potential M&A collaboration.

Usage in Process

Usually forms the basis for further negotiations and drafting of the purchase agreement.

Typically comes after the term sheet, Indication of Interest, or both.

Less common in mergers and acquisitions but is usually used to ensure that you and the buyer agree on your obligations and responsibilities before due diligence and further negotiations.

Role of Legal Counsel

The legal counsel often helps review and negotiate the term sheet to protect your interests as the seller.

The legal counsel usually helps review the document to identify potential issues and negotiate on your behalf.

The legal team may help you draft, review, and negotiate the responsibilities and obligations.

Note: The three documents may be used in place of each other in the US, depending on the deal and the parties involved.

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Why is a Term Sheet Important for Mergers and Acquisitions?

Here's why a merger and acquisition term sheet is essential:

• Getting Basic Framework for Legal Documentation: Even with a non-binding term sheet, you get the basis for drafting an acquisition agreement with all the agreed terms added.
• Securing Clarity: A business sale or merger term sheet can help you and the buyer clearly understand the basic terms of the deal, ensuring that your interests are aligned.
• Reduced Risk of Failure: Term sheets may help reduce the risk of misinterpretations and misunderstandings that may cause disputes in later stages. You may address the issues before proceeding further, potentially saving the deal.
• Building the Framework for Due Diligence: Defining the deal terms may help you focus only on the important things during due diligence, which may uncover issues early and avoid delays or surprises.

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How to Draft an M&A Term Sheet and What to Include

As mentioned, the buy side typically drafts the term sheet and sends it to you for negotiations and signing.

That’s why you may want to consider the following key aspects they may keep in mind when writing the document:

• Encouraging Feedback from the Recipient: For an effective term sheet, the buy side usually encourages you to respond by providing feedback.
• Stating the Binding Nature Explicitly: The buy side typically states explicitly whether the term sheet is binding and which sections are binding, if so.
• Summarizing the Conditions: Most often, the buy side summarizes the conditions and terms at the beginning by stating the agreement's overall purpose and expected outcomes.

Below are the elements you may expect in an effective term sheet:

1. Purchase Price: The document usually mentions the proposed initial purchase price.
2. Payment Method and Structure: A term sheet usually outlines how the buyer hopes to make payments, whether in cash, earnouts, or stock. The timing of the payment may be mentioned as well.
3. Included Assets: The buyer may indicate the assets they are willing to buy and the ones they wish to exclude.
4. Confidentiality: Your buyer may ask that you both keep the pending sale and any sensitive information under wraps for a specified duration.
5. Exclusivity: You may be required to stop soliciting or accepting unsolicited purchase offers for your company from other potential buyers for a specific duration to allow the drafting party to conduct preliminary due diligence.
6. Due Diligence: The buyer typically outlines their due diligence plan, including what they might require from you and the time they would require.
7. Representations and Warranties: Representations are the statements of past or present facts the buyer makes to you. Warranties are promises or guarantees the stated facts are accurate. Typically, you make the same assurances to the buyer.
8. Conditions Precedent: Your buyer may add the conditions they may want you to meet before proceeding with the deal, such as getting antitrust approvals or third-party consents.
9. Employee and Management Issues: Most buyers often mention how they wish to treat your employees after the acquisition. They may promise to retain key employees or provide employee benefits.
10. Governing Law and Dispute Resolution: A term sheet usually states the jurisdiction whose laws govern the agreement and how you may resolve disputes.
11. Deal Structure: Your buyer may propose how they would like to structure the deal. The options may include a merger or an acquisition. They may also suggest an asset sale or stock sale.
12. Indemnification: The term sheet may include a clause safeguarding both parties against potential breaches of representations, covenants, or warranties after the deal closes.
13. Normalized Working Capital: Term sheets often include the buyer's suggestion that your business maintains an adjusted or normalized level of working capital up until the transaction closes.
14. Holdback or Escrow: Typically, the buyer may ask to use escrow or hold back a part of the purchase price as security against the potential breaching of representations, warranties, or covenants.
15. Termination Rights: The term sheet may include the conditions under which either you or the buyer may terminate the transaction.

Evidently, reviewing and negotiating a favorable term sheet can be an uphill task, given the many elements you need to look out for. You may have to work with an attorney to help you.

When you talk to us at Exitwise, we can help you hire and manage an experienced attorney to help you review and negotiate an effective term sheet. Talk to our M&A team today to start the hiring and management process.

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Common Pitfalls to Avoid When Drafting a Term Sheet

As you review and negotiate the term sheet for an asset purchase, merger, stock purchase, or acquisition, you may want to watch out for the following pitfalls:

• Vagueness: Any ambiguities in the term sheet for the acquisition of your company may cause misunderstandings and disputes that may sink the transaction.
• Being Over-Detailed: While adding too much detail to the term sheet may seem positive, it may be a sign that the buyer is unwilling to compromise.
• Failure to Differentiate Binding and Non-Binding Terms: You’ll want to watch out for evidence that the buy side failed to distinguish between non-binding and binding terms. The failure may mean they aren't well-represented and perhaps not wholly serious about the potential deal.
• Overlooking Due Diligence: The buyer may fail to outline their intended due diligence plan, including the expected timeline or the information they may require from you. The failure may signal a lack of seriousness or total commitment to seeing the deal sail through.
• Leaving Out Key Financial Terms and Conditions: Usually, you expect the buyer to request that you meet certain financial requirements, such as favorable quality of earnings, tax records, or revenues. Leaving out such information may indicate laxity on their part.
• Failure to Set Realistic Timeframes: Poorly set timelines may cause the deal to drag on, potentially leading to frustration and total failure.

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Frequently Asked Questions (FAQs)

Below are common questions about M&A term sheets:

What is the Difference Between a Term Sheet and a Contract?

A term sheet is usually not legally binding and is preliminary, while a contract is typically legally binding and more conclusive because it includes the terms and conditions of the deal as finally agreed upon.

Can an M&A Term Sheet be Modified After it Has Been Signed?

The possibility of modifying a term sheet usually depends on the parties involved and the changes needed. Some changes may be difficult to renegotiate and modify once signed.

However, you and the buyer may agree to modify the term sheet if you both agree to the proposed changes.

You might want to start working with an M&A attorney right from the start to help you get things right and avoid needing modifications. We at Exitwise can help you work with the best attorney for your custom needs.

What Are the Typical Timelines for Negotiating and Finalizing an M&A Term Sheet?

Typically, buyers give you a few days to a week to respond, negotiate, and finalize a term sheet. If you need more time, you may negotiate that with the buyer.

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Conclusion

You may find it difficult to review and negotiate an effective M&A term sheet on your own because it usually contains many provisions.

So, you may want to work with M&A attorneys and other professionals to help you evaluate the document and negotiate the best terms possible.

When you work with our team at Exitwise, we can help you recruit and manage industry-specific M&A experts to help with the many aspects of your business exit.

Schedule a consultation with us at Exitwise today so we can help you find the best M&A attorney to help you draft, review, or negotiate all the documents related to your business sale.