Pittsburgh | Raleigh Business Brokers – What is a Term Sheet?
Buyers, sellers, intermediaries and advisors often use a term sheet prior to the creation of a formal, legally binding purchase and sale agreement. However, very rarely do you ever hear this document explained. It sounds good but what is it specifically?
Very few books about the M&A process even mention term sheet. It is typically a one page document that states the sale price along with the deal structure and whether or not it includes the real estate.” Attorney and author Jean Sifleet offers this explanation: “A one page ‘term sheet’ answering the questions: Who? What? Where? and How Much? helps focus the negotiations on what’s important to the parties. Lawyers, accountants and other advisors can then review the term sheet and discuss the issues.” She cautions, “Be wary of professional advisors who use lots of boilerplate documents, take extreme positions or use tactics that are adversarial. Strive always to keep the negotiations ‘win-win.'”
If the buyer and the seller have verbally agreed on the price and terms, then putting words on paper can be a good idea. This allows the parties to see what has been agreed on, at least verbally. This step can lead to the more formalized letter of intent based on the information contained in the term sheet. The term sheet allows the parties and their advisors to put something on paper that has been verbally discussed and tentatively agreed on prior to any documentation that requires signatures and legal review.
A term sheet is, in essence, a preliminary proposal containing the outline of the price, terms and any major considerations such as employment agreements, consulting agreements and covenants not to compete. It is the initial step to putting a deal together.