When it comes to a buying or selling a business, you’ll need a well-crafted M&A term sheet to ensure the transaction is as smooth and successful as possible. This document should be comprehensive and cover all the details of the deal to protect both parties involved.
In this article, we’ll cover 21 key components that shouldn’t be overlooked when drafting your term sheet.
Note that this article is provided for informational purposes only and does not constitute legal advice. If you have any questions or concerns about your particular situation, please consult your M&A advisors and a qualified attorney.
What is an M&A Term Sheet?
The term sheet is a formal, written agreement that outlines the terms and conditions of an M&A transaction. It’s generally not legally binding, but it sets out the key points of the deal that will be included in a more detailed purchase agreement.
Drafting a term sheet is a crucial step in M&A negotiations since it can save time and money if all parties agree on the key points early on in the process.
The details outlined in an M&A term sheet include, among other things:
• Deal structure (stock sale or asset sale)
• Purchase price (cash, stock, or some combination thereof)
• Payment terms (lump sum payment versus installments over time)
• Warranties regarding accuracy of financial information provided
• Restrictions on company management (such as no-hire clauses)
• Post-closing obligations (such as work to be completed by one or both parties)
• Other due diligence issues (such as employee benefit plans, regulatory approvals, etc.)
• Representations and warranties of each party
• Indemnification provisions
• Financing arrangements
• Closing date
An M&A term sheet is an important document that should be carefully reviewed and negotiated. It’s a starting point for the purchase agreement and sets the tone for the entire transaction.
Once all parties have agreed on the terms in the term sheet, they can move forward with confidence knowing that their interests are protected throughout the process.
What is the Difference Between an LOI and Term Sheet?
Both letters of intent (LOIs) and term sheets are important documents in the M&A process. The LOI is usually the first document prepared by buyers and sets out a non-binding framework for the key points of a deal, such as purchase price, structure, and payment terms.
The term sheet is typically prepared after the LOI has been accepted and outlines more detailed terms that will be included in the purchase agreement. It’s a formal written agreement between both parties that sets out all of the specific conditions that must be met for the transaction to close successfully.
Who Prepares the Term Sheet?
Drafting a term sheet is no easy task, since it requires knowledge of the legal and financial aspects of buying or selling a business. It’s important to consult with your advisors to ensure that all parties are fully informed and protected in the transaction.
The term sheet is typically prepared by the buyer’s legal counsel. It will often include input from both the buyer and seller, as well as other parties involved in the transaction, such as financial advisors. The goal is to create an agreement that works for all parties involved and sets out the conditions of the deal so that it can be finalized in a legally binding purchase agreement.
How to Review a Term Sheet
A term sheet should be carefully reviewed by both parties before signing. Make sure that all of the details outlined in the document are accurate and that they reflect your understanding of the deal. Pay special attention to the payment terms, warranties, indemnification provisions, and any other due diligence issues outlined in the term sheet.
If there are any discrepancies or areas of concern, make sure you address them before signing off on it. It’s also important to ensure that everyone involved in the transaction is aware of their obligations and responsibilities set out in the agreement.
Take your time to review and negotiate it to make sure it meets your needs before signing.
Key Points of a Term Sheet: What Should a Term Sheet Include?
An M&A term sheet is should be carefully reviewed and negotiated to ensure all parties involved are on the same page regarding their rights and obligations under the deal.
An M&A term sheet should be customized to meet your particular needs, but the fourteen components we’ll cover are essential for every term sheet. Make sure you include each of them when drafting yours to ensure that you have everything covered before moving forward with negotiations.
With careful consideration of each point, you can create an agreement that works for all parties involved and sets out the conditions of the deal so that it can be finalized in a legally binding purchase agreement.
Here are 14 items you should include in your term sheet:
1. Names and Addresses of Buyer and Seller
The names and addresses of both the buyer and seller(s) should be included in the term sheet. This will ensure that both parties are aware of who is involved in the transaction.
2. Purchase Price, Payment Terms, and Deal Stack
The amount that the buyer has agreed to pay for the business should be clearly outlined in the term sheet. This may include cash, stock or other considerations. It is important to note any contingencies or conditions related to the purchase price as well.
The details should be spelled out clearly so there is no confusion as to how payment will take place. Be clear about who is responsible for certain costs, such as closing costs, legal fees, and any other expenses associated with the deal.
- How will payment be made?
- Is it a lump sum or paid out over time?
- Are there any contingencies that must be met before payment is made?
- What are all the different components of the overall transaction?
3. Detailed List of Assets Sold and Carve Outs
In the term sheet it is important to include a detailed list of assets that are being transferred.
This section should outline exactly what is being bought and sold in the deal, including any assets involved (any carve-outs that are excluded should be clearly specified). This will help ensure there is no confusion as to what assets are included in the transaction.
4. Closing Date
The date when all parties agree that the sale is completed and funds have been exchanged should be stated in the term sheet. This date might also trigger certain actions such as transferring ownership of the business, releasing assets, and other duties that must be completed by both parties.
It is also important to include any conditions related to this date such as appraisals or other due diligence measures that must take place before closing can occur.
5. Closing Conditions
The term sheet should also include any closing conditions that must be met in order for the transaction to move forward.
This could include items such as obtaining financing, regulatory approval, investor approval, etc.
Having this information clearly outlined in the term sheet will help both parties understand what they need to do before the sale can be completed.
6. Non-Binding Agreement
The term sheet should clearly state that it is a non-binding agreement. This means that both parties are not committed to the deal until they enter into an actual purchase and sale agreement.
This protects both parties in case unforeseen issues arise or other changes occur after the term sheet is signed.
7. Warranties
The term sheet should include any warranties or representations made by either party in regards to the sale. This could include things like a warranty against liens or encumbrances, representations regarding the financials of the company, and any guarantees about future performance.
8. Indemnification
This clause states that one party agrees to cover all costs incurred by the other party if certain actions are taken (or not taken) during the course of the transaction.
This could cover liabilities such as taxes, legal fees, or other expenses that may arise during or after the transaction takes place.
This provides an additional layer of protection for both parties involved in the sale.
9. Non-Compete Agreement
This agreement prevents either party from competing against the other, either directly or indirectly. It is important to have this agreement in place so that the buyer has confidence that they are not going to be facing competition from the seller immediately after the sale is finalized.
10. Insurance Requirements
The term sheet should also include details on any insurance that is required by either party during the course of the transaction. This could include Professional Liability Insurance and Errors & Omissions Insurance for both parties.
It is important to clearly specify which party is responsible for obtaining and maintaining the insurance policies. Having this information outlined in the agreement can help protect against any unforeseen circumstances or liabilities arising during the course of the sale.
11. Confidentiality Agreement
A confidentiality agreement is an important part of any transaction involving sensitive information. The term sheet should include clear language making both parties aware that they must keep all confidential information obtained during negotiations confidential and not share it with anyone else unless expressly permitted by law or contract.
This clause should also include a timeline for when the confidentiality agreement expires, or any other terms related to its use. This helps ensure that both parties remain in compliance with their commitment to protect sensitive information.
12. Definitive Agreement to Follow
The term sheet should state that a more detailed purchase agreement will be created and signed by both parties once the terms of the sale have been finalized. This agreement should include all of the details outlined in the term sheet, as well as any additional provisions or requirements agreed to by both parties.
Any other important clauses or conditions should also be included in the definitive agreement. This ensures that everyone is clear on what they are agreeing to before signing a legally binding contract.
13. Transfer of Assets
The term sheet should detail how assets and liabilities will be transferred from one party to the other. This could include a description of the assets that are being transferred and when they will be delivered. It should also include information on any payment terms, such as whether or not the buyer will need to make a down payment prior to transferring ownership of the assets.
The term sheet should also address how liabilities related to the sale will be handled, such as outstanding debts or taxes. It is important to ensure that all of these items are addressed in writing prior to closing so that both parties can feel confident that they have an understanding of their respective obligations during and after the transaction has taken place.
14. No Non-Ordinary Course Acts
The term sheet should also include a clause stating that the seller will not take any action that could be detrimental to the buyer after closing. This includes taking on additional debt or making changes to the business operations without prior consultation and approval from the buyer.
This clause protects the buyer’s investment in the company by ensuring that they are not surprised with unexpected costs or obligations after closing on the sale. It is important to ensure that this clause is included in order to avoid potential disputes down the line.
15. Due Diligence Period
A due diligence period allows for buyers to review all relevant documents related to the sale in order to ensure that all of the information provided is accurate and up-to-date. The term sheet should outline how long this period will last, as well as any conditions or stipulations regarding what type of documents must be reviewed during this time.
It is important to note that if any discrepancies arise during this process, either party has the right to walk away from the deal without any financial repercussions.
The term sheet should also detail how due diligence will be conducted during negotiations for the sale of a business. This includes things like confirming financial statements, reviewing contracts and agreements, and examining any other relevant documents that the buyer may need to make a fully informed decision about their purchase.
16. Non-Solicitation
You should include a clause that states neither party can solicit employees, customers, suppliers, or other business partners of the other party during the sale negotiation period and for a specified time after closing. This ensures that both parties are protected from being taken advantage of by the other party’s business contacts.
This clause should be included in order to avoid any potential conflicts between the two parties and protect their respective interests throughout the sales process.
17. Standstill Agreement
A standstill agreement prevents the seller from trying to get offers from other potential buyers while you’re deep in the deal process.
This clause should state that the buyer is not allowed to solicit other offers or negotiate with other sellers while they are in the process of negotiating a deal.
18. Attorney Fees
You should also include a section detailing who will be responsible for attorney fees related to the sale. Who is on the hook to pay legal fees if the deal falls through?
It is important to ensure that this information is clearly stated in order to protect yourself and avoid any misunderstandings between the parties down the line.
19. Governing Law
The term sheet should also include information on the governing law for any disputes or disagreements that may arise during the course of the sale.
This will help to ensure that all parties involved understand what rights and remedies are available to them in case something goes wrong.
20. Each Party Covers Their Expenses
Make sure to include a clause stating that each party is responsible for covering their own expenses associated with the transaction.
This will help to avoid any confusion or disputes over who will be paying for what during the course of the sale.
21. Signatures from Buyer and Seller
The term sheet should end with both parties signing the document in order to make it legally binding.
This is a crucial step as it ensures that all of the terms and conditions outlined in the agreement are mutually agreed upon by both parties.
Once this has been done, the sale can proceed according to the terms laid out in the document.
What Happens After the Term Sheet is Signed?
Once both parties have agreed on the terms in the term sheet, they can move forward with confidence knowing that their interests are protected throughout the process. The next step is usually to draft and sign a formal purchase agreement that further outlines all of the terms and conditions of the M&A deal.
The purchase agreement should be reviewed by both parties and their legal counsels and should address concerns such as regulatory approvals, indemnification clauses, employee benefit plans, financing arrangements and post-closing obligations. Once it’s been finalized, each party will be legally bound by its provisions.
Even after the purchase agreement is signed, there may be some post-closing tasks that need to be completed before the acquisition can be finalized. This could include regulatory filings and obtaining any necessary approvals from government agencies or shareholder groups. It’s important to make sure all of these requirements are taken care of in a timely manner to avoid any delays in closing the deal.
Conclusion
We covered some of the key elements that should be included in a term sheet when selling or buying a business. By including all of these points in the term sheet, it can help ensure both parties have an understanding of their respective rights and responsibilities during and after the sale has taken place.
It’s been shown that 70-90% of M&A transactions fail (Harvard Business Review), so remember that being thoughtful here can greatly improve your odds of success.
Make sure to rely on your M&A advisors throughout the process: the term sheet should be reviewed by legal counsel before being finalized, as it can have serious implications if not properly drafted.
It is important to ensure that all details are addressed prior to signing any legal documents. Doing so will help minimize any potential misunderstandings or disputes between the two parties and make sure everyone is on the same page during negotiations.
