What is a Term Sheet and Why is it Important?

Buyers, seller, advisors, and intermediaries often mention use of a “term sheet” prior to the creation of an actual purchase or sale agreement, but rarely will you hear the term explained. What is a term sheet and why is it important? This post will address these questions.

What is a Term Sheet?

Even though term sheets are important, they are rarely mentioned in books about the merger and acquisition process. Russell Robb, author of the book, Streetwise Selling Your Business, defines term sheet as, “Stating a price range with a basic structure of the deal and whether or not it includes real estate.”

Attorney and author Jean Sifleet explains that a term sheet simply answers four questions: Who? What? Where? How Much? She points out that lawyers, accountants, and advisors can subsequently review the document and discuss the issues it addresses.

Creating the Right Environment

A good term sheet can keep everyone focused on what is important and keep negotiations on target. The document’s main goal should be to maintain a “win-win” environment.

If a buyer and a seller have a verbal agreement on price and terms, it is important to put that agreement down on paper. This information can lead to a more formalized letter of intent. The term sheet functions to help both parties, as well as their respective advisors, begin to shape a deal, taking it from verbal discussions to the next level.

Make Sure Your Term Sheet Has the Right Components

A term sheet is essentially a preliminary proposal containing key information. It outlines the price, the terms, and any major considerations. Major considerations can include everything from non-compete clauses to consulting and employment agreements.

The term sheet is a valuable tool and when used carefully, it can greatly help streamline the buying and selling process. Proper use of a term sheet can help one avoid a range of misunderstandings and, thus, help increase the chances of successfully finalizing a deal.

The process of buying and selling a business is a complex one. Professional merger and acquisition advisors, like those at EastWind Business Solutions, can help you navigate this process, avoid costly mistakes, and achieve a successful outcome.