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What is a Term Sheet?

The term sheet is the first material written document that passes between a potential buyer and a potential seller. It can range in length and format, although some conventions have developed over time. It is usually created by the buyer, who provides the basic terms of the acquisition, hence its name: the term sheet.

Who Creates a Term Sheet?

The term sheet is typically created by the buyer of an asset or a business.  The purpose is put the terms down on paper to remove some ambiguity about the terms of the acquisition.

What is The Purpose of a Term Sheet?

Generally, the idea is to convey, other than through conversations or informal emails, what the deal is going to look like. Term Sheets or Letters of Intent are usually non-binding. They are designed to just get the intentions of the parties on paper to make sure that there is an understanding upon which both the buyer and seller agree.

It is important to make sure that a letter of intent or a term sheet is non-binding because it otherwise has all the elements of a contract: it is in writing and it is usually signed by both parties.  That in and of itself is enough to make it a contract. As a result, it is important to have language in the document to state that it is not binding, because the default is that it would be a binding agreement. That means a buyer could theoretically agree to acquire a multi-million dollar asset with a two page term sheet. Nobody wants to do that. Consequently, it is important to make sure that it is not binding.

It is important to make sure that a letter of intent or a term sheet is non-binding because it otherwise has all the elements of a contract: it is in writing and it is usually signed by both parties.  That in and of itself is enough to make it a contract. As a result, it is important to have language in the document to state that it is not binding, because the default is that it would be a binding agreement. That means a buyer could theoretically agree to acquire a multi-million dollar asset with a two page term sheet. Nobody wants to do that. Consequently, it is important to make sure that it is not binding.

To make things a little more complicated, however, sometimes a buyer wants some terms to be binding. For example, you may want an exclusivity period mentioned in the term sheet that prohibits the seller from shopping the deal around while the parties are negotiating the purchase agreement. Even though a term sheet seems like a simple document, it can get a party into a lot of hot water if it isn’t done right.

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