Understanding Term Sheets: What You Should Know
When you’re on the journey of selling your business, you will likely encounter a term sheet at some point. This document, as the name implies, outlines the “terms” of the deal, encapsulating the primary economic terms and conditions of a potential acquisition. A term sheet lists the conditions to be fulfilled if the sale goes through, but it is not legally binding.
What Separates a Term Sheet from an LOI?
Both a term sheet and a letter of intent (LOI) encompass provisions and lists that a buyer and seller need to agree upon. The major distinction lies in that a term sheet doesn’t necessitate a signature, while an LOI does. In many instances, buyers might be reluctant to sign prior to the due diligence phase. In such cases, you’ll often find the term sheet precedes the LOI.
How Extensive Can Term Sheets Be?
Term sheets don’t adhere to a standard format or structure, which means their length can vary greatly. They might be as short as a single page or extend to five or more pages. Regardless of its length, a term sheet should clearly state what is being purchased and the agreed-upon price. In some scenarios, the information in a rudimentary term sheet may pave the way for a formal LOI.
What Elements Should Be Incorporated?
Beyond the price and terms, a term sheet can encompass other considerations pertinent to the business purchase. These might include employment agreements or non-compete clauses, as well as conditions to be satisfied upon closing. Term sheets often outline plans for the buyer to conduct due diligence and gather additional information. You can anticipate finding everything from warranties and inventories of what is included in the sale to exclusivity clauses within term sheets.
One crucial element of the term sheet that should never be underestimated is the payment method. Typically, the payment sections delve deeper than just “cash at close.” They usually describe a combination of elements, including cash at closing, among other forms of payments. In some cases, they might detail arrangements regarding a seller-financed loan.
The term sheet serves as a beneficial tool, as it can streamline the sales process and preempt significant misunderstandings. Consequently, this non-legally binding document can foster a smooth start to a successful deal.
