A term sheet is used to start negotiations by allowing the parties to focus on the key terms of a transaction. Its primary objective is to enable each party to focus on the key elements of the transaction before preparing a detailed letter of intent (LOI) or purchase agreement.
The term sheet is a short bullet list of the key points of the transaction, such as the selling price, earnest money deposit, down payment, financing terms, length of time for due diligence, training agreement, non-compete agreement, contingencies, and other essential terms.
We have seen many parties spend dozens of hours and thousands of dollars in attorney fees when they have not agreed on the basic terms and structure of a transaction. A term sheet can be as simple as a sheet of paper with your agreement regarding the basic terms.
Use the term sheet for discussion purposes only. It allows you to focus on structuring the key elements of the deal without concerning yourself regarding the language required to document those terms. If you can agree on the term sheet, you can move straight to a letter of intent or a definitive purchase agreement.
You’ll want to agree on the following basic terms of the transaction:
- Selling price
- Earnest money deposit, if applicable (corporate buyers don’t usually provide an earnest money deposit)
- Down payment
- Holdback, if applicable
- Seller note — amortization period, interest rate
- Due diligence length
- Training length
- Non-compete agreement
- Any contingencies
It doesn’t make sense to prepare a lengthy purchase agreement if you can’t agree on the basic terms listed above. We see many sellers make the mistake of calling an attorney before they have a real deal. You don’t need to involve your attorney until you agree on the essential elements.
A term sheet is usually not necessary if the buyer is a private equity group or sophisticated corporate buyer — in these cases, the buyer usually prepares a letter of intent and presents it to you.