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Demystifying Term Sheets – The First Step for Closing the Deal

Demystifying Term Sheets – The First Step for Closing the Deal

So what is a Term Sheet, anyway?

A term sheet is essentially an outline of a proposed transaction. This allows the parties to identify and agree (generally in a non-binding way) on the basic terms of the deal. Before the lawyers get involved to start papering the deal and performing due diligence, it is important to make sure that there is a reasonable likelihood that the deal will occur. If the parties cannot agree on basic, fundamental terms of the deal, there is no reason to continue incurring expenses, and it is far better to know this up front.

Term sheets are also important to assist your professional service providers.  Your attorney will need to draft very different types of documents depending on how the deal is structured.  There may also be financing considerations you will need to discuss with your banker and/or tax implications to discuss with your CPA. Without a term sheet and a clear picture of how the deal will move forward, it is very difficult to even begin work. Clarifying the terms up front helps to prevent delays, which ultimately saves the parties time, money and frustration.

Will I be legally bound to this?

It is important to note that term sheets are not generally legally binding documents.  To the extent that the parties have an implied duty to negotiate in good faith, however, it can have very important implications to the transaction going forward. There are also exceptions to this general rule.  In some term sheets, key provisions may be binding on the parties, such as no-shop provisions (agreements not to solicit other potential deals while negotiations are ongoing) or a confidentiality provision (agreement not to disclose confidential information shared during the course of negotiations). In some cases, there may be an entirely separate confidentiality or non-disclosure agreement (NDA) in addition to the term sheet, or these provisions may be merged into a single document.

Do all term sheets look the same?

There are numerous ways to structure a term sheet.  There are common models created by major finance and law firms, but it can be as simple as a bullet point list or a chart with terms. In addition, the term sheet may continue to change as negotiations progress. It is simply a tool to be used to clarify expectations and facilitate productive communications.

What do I do when I receive a term sheet?

Your attorney can help draft or review a term sheet and explain the legal implications of the terms proposed and possible courses of action moving forward.

Allen & Gooch is providing this legal update for informational purposes only. This article should not be construed as legal advice or a legal opinion as to any specific facts or circumstances. You should consult your own attorney concerning your particular situation and any specific legal questions you may have.