A term sheet (also often referred to as a heads of agreement, memorandum of understanding, letter of intent or a non-binding indicative offer) is a preliminary document that outlines the key terms of a potential sale of a business and serves as a starting point for negotiations.
Term sheets are typically not intended to be legally binding documents. Still, they can have certain provisions that are binding (e.g., terms relating to confidentiality and exclusivity will often be expressed as being legally binding).
A term sheet is not the same as the final sale contract (e.g., a share sale agreement or asset sale agreement) which will bind the seller and the buyer into a legal arrangement. Whilst there is no requirement to have one, having a well-drafted term sheet in place can provide a number of benefits when engaging in a transaction.
What are the benefits of having a term sheet in place?
The key benefit of having a term sheet is that it clarifies the main terms and conditions of a deal upfront. It helps to identify deal breakers and major differences in expectations, reducing misunderstandings and disagreements during the later stages of negotiation. This can help to avoid lengthy and costly legal negotiations on key issues down the line.
A term sheet can also offer a level of protection to the parties during negotiations – provisions relating to exclusivity (a no-shop clause) can be included to prevent one party from negotiating with other potential buyers or sellers for a specified period.
What should be included in a term sheet?
While the specific contents of a term sheet can vary based on the nature of the deal and the parties involved, some common elements that a term sheet might include:
Transaction Structure:
- For example, outlining whether the sale is an asset purchase or a share purchase.
Purchase Price:
- Clearly state the total purchase price.
- Specify if the price is a fixed amount or subject to adjustments.
Payment Structure:
- Detail how the purchase price will be paid (e.g., lump sum, earnout, instalment payments, or a combination).
- Outline any escrow arrangements.
Timescales:
- Specify the date that both parties should target to complete the transaction.
Conditions Precedent:
- List any conditions that must be satisfied before the transaction can proceed.
- Common conditions include regulatory approvals, third-party consents, the completion of due diligence.
Covenants:
- Outline any specific actions or restrictions that the parties agree to take or avoid during the transaction process.
Confidentiality and Exclusivity:
- Include provisions to protect the confidentiality of the deal.
- Specify any exclusivity arrangements, such as a no-shop clause.
It is advisable to involve legal and financial advisers when preparing and negotiating a term sheet as problems or misunderstandings regarding the terms can lead to increased costs and delays later in the transaction.
Written by Nav Mesbah
Disclaimer
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Accordingly, the information on this site is provided with the understanding that the authors and publishers are not providing legal advice. As such, it should not be used as a substitute for consultation with professional legal advisers. Before making any decision or taking any action, you should consult with a professional lawyer from Rouse Lawyers.
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