The Bite-Size Business Brief: Term Sheets

Term Sheets

Once parties shake hands on a proposed transaction, the next step is to instruct lawyers to get working on the definitive agreements. At this point it is prudent for parties to take a step back and consider capturing the key terms of the transaction in a term sheet or letter of intent – a relatively short preliminary agreement signed by the parties that describes the key terms of a transaction, largely on a non-binding basis. 

What are the benefits of a term sheet?

In short, it should save both time and money. While it does require time and money to agree a term sheet, it will likely flush out the key terms of the transaction and set parameters around timing. If parties are unable to agree fundamental key items at term sheet stage then it likely proves that the deal would not have concluded, thus saving time and money by not prematurely negotiating long and complex definitive agreements. Having a term sheet can also prove to be a good deal strategy for a seller. Fixing certain key items in a term sheet may also favour a seller (when it has more leverage) as later renegotiation may prove challenging.

What to include?

Summarise key deal points – parties should focus on brevity and including enough detail to cover the key deal points. A balance should be struck in ensuring that detailing and negotiating the finer points is left to the definitive agreements. 

Generally non-binding nature – the term sheet provides a guide for the lawyers to draft the definitive agreements and should reduce the risk of later misunderstanding or unnecessary disputes. The term sheet will usually provide that it is non-binding in nature and is subject to signing the definitive agreements. However, certain terms may be stated as binding on the parties, for example, those related to confidentiality and exclusivity (see below).

Exclusivity – a buyer will usually want the comfort that they are the sole party negotiating with the seller and that they have a legally binding exclusive arrangement for a fixed period of time to negotiate the transaction. A seller should ensure that the exclusivity period is not longer than is necessary for a buyer to conclude investigations and for the parties to agree on the definitive agreements. If a buyer is taking too long then a seller will want the ability to consider other potential buyers.

Key terms – these may include (i) the transaction structure (e.g. share vs asset deal); (ii) the purchase price; (iii) any price adjustments, holdbacks or escrow arrangements; (iv) key conditions to be satisfied prior to signing e.g. any restructuring of the target or special due diligence reviews or regulatory consents; (v) liability caps; and (vi) governing law and dispute resolution forums.