“Give me six hours to chop down a tree and I will spend the first four sharpening the axe.”
― Abraham Lincoln
Congratulations! You’ve decided to move forward on a substantial business transaction. You’re ready to make it official and paper this deal. But before you jump into a full blown encyclopedia length contract, consider a Term Sheet first.
What is a term sheet?
Term Sheet. Letter of Intent. Memorandum of Understanding. Deal Memo. There are many different names for the same document….which makes sense because this one document can be helpful in so many different industries.
A term sheet is a document that provides a foundation for a longer, more detailed contract to come later. They are often used in transactions for the purchase or sale of a business, a merger or acquisition, or a venture capital investment. Depending on the wording, a term sheet may be binding or non-binding on the parties.
What are the advantages of having a term sheet?
Yes, it might sound crazy to enter into a contract before you enter into a contract. But term sheets are valuable in providing a framework for the final agreement, which can potentially save a lot of time and money. You can decide to just start building a house and go back and forth on structure and detail, ripping out appliances and knocking down walls until you get it right….or you can start with organized blue prints and build more efficiently. Because the key terms of the contract have already been negotiated in a term sheet, parties can spend less time and money on the long form agreement. Lawyers can focus on the legal issues rather than negotiating basic business terms.
A term sheet is also a form of assurance that both parties are generally on the same page and are committed to seeing the deal go forward. No one wants to spend months and thousands of dollars negotiating a contract just to find out that the parties didn’t see eye to eye on a key business point. Depending on the nature of the transaction, some term sheets will require a deposit or preliminary payment to ensure that there’s skin in the game.
Another benefit of a term sheet is that it can help both parties as they engage third parties. If you are looking for financing, presenting a term sheet to an investor or bank can show them that both parties are serious about making the deal a reality.
What should be in a term sheet?
The point of a term sheet is to get the basics out of the way. Some necessary terms are intuitive: price, deal structure, payment schedule, etc. But there are some terms you might not have considered:
- Due Diligence: Each party may want to continue to perform more due diligence before they finalize the deal. How much time will they have to do this, and what records will they have access to?
- Confidentiality: The parties may wish that the information exchanged through the negotiation and due diligence, as well as the term sheet itself remain a secret. If the whole world knows what you are up to it may weaken your bargaining position.
- Non-Compete: Assuming a buyer is going to run the business with a new team, they probably want to prevent the seller from turning around and opening up a competing business next door.
- Exclusivity and “No Shop” Provisions: Typically, buyers do not want sellers to use their purchase terms to shop for a more favorable deal. In a term sheet, the buyer will usually prevent the seller from soliciting other buyers for a certain time period.
It’s important to remember that a term sheet is just the first step in entering into a transaction. You should consult an attorney to assist with the legal consequences of the deal. Even a simple term sheet could have far-reaching implications, and you want to make sure it is drafted correctly before you sign on the dotted line.
This Blog is made available by Romano Law PLLC for general informational and educational purposes only, not to provide specific legal advice. By using this Blog you understand that there is no attorney client relationship between you and Romano Law PLLC or any individual contributor. You should consult a licensed professional attorney for individual advice regarding your own situation.