M&A | The term sheet

In an acquisition, it is common for parties to spend dozens of hours and thousands of dollars in advisor fees. This happens when they have not agreed on the basic terms and structure of a transaction. Or, for example when parties do (start to) disagree at a later point in the process. To avoid these problems, a term sheet can help.

A term sheet is used to start negotiations by allowing the parties to focus on the key terms of a transaction before a detailed letter of intent or purchase agreement is drafted.

The term sheet is a brief summary of the key points of the transaction, such as the sale price, financing terms, scope (and duration) of due diligence, non-competition clause, contingencies and other essential terms.

Use the term sheet for discussion purposes only. This allows you to focus on structuring the key elements of the deal without worrying about the language needed to document those terms. If you can agree on the term sheet, you can move on to drafting a detailed letter of intent or a final purchase agreement.

Be aware that it is clearly agreed when the purchase agreement comes into existence. Often the term sheet includes a caveat that the purchase agreement will not be established until it is set forth in a signed written purchase agreement.

You want to agree on at least the following basic terms of the transaction:

• Purchase price
• Financing terms
• Scope and duration of due diligence
• Non-competition
• Exclusivity
• Any unforeseen circumstances

In addition, elements that are essential should be considered for each transaction. For example, in an acquisition where there are multiple shareholders after the transaction, agreement on key elements should also be reached on the shareholder agreement and, in the case of a director staying on or being appointed, on the employment contract or management agreement.

There is no point in drafting a long purchase agreement if you cannot agree on the basic terms mentioned above. We regularly see that buyers/sellers (too) quickly start drafting a purchase agreement before agreement has been reached on the essential points.

A term sheet can be as simple as a single page with your agreement on the basic terms. As the transaction becomes more complicated, it is advisable to pay more attention to this.

Would you like help drafting, negotiating or checking a term sheet? Or do you have a dispute about this?

Our specialists regularly advise on mergers and acquisitions. With our knowledge, we can give you good and targeted advice to avoid potential pitfalls. You can reach us by mail, phone or via the contact form at the bottom of this page.