What Should You Expect from Term Sheets?
If you’re selling your business, you’ll likely be presented with a term sheet at some point. As the name suggests, this document will include the “terms” of the deal, including the basic economic terms and conditions of a prospective acquisition. It is a list of requirements to be met if the sale successfully takes place, yet it is not legally binding.
What is the Difference Between a Term Sheet and an LOI?
A term sheet and letter of intent (LOI) will include stipulations and lists for a buyer and seller to agree upon. The significant difference is that the term sheet doesn’t require a signature, while the letter of intent does. In many cases, buyers hesitate to sign before the due diligence stage. In this situation, you may find that the term sheet will precede the LOI.
How Lengthy are Term Sheets?
There is no standard model or form to a term sheet. Therefore, it may be as short as one page, or it could even be five or more pages. But no matter how many pages it may be, it should explain what is being purchased and a stated price. Sometimes, the information in a basic term sheet will lead to a formal letter of intent.
What Components Should be Included?
In addition to the price and terms, a term sheet can include other considerations relating to the purchase of the business. For example, it can consist of employment agreements or non-compete clauses. They can also have conditions to be met upon closing. Often the term sheet will detail plans for the buyer to conduct due diligence and gain additional information. You can expect to find everything from warranties and lists of what is included in the sale to exclusivity clauses within term sheets.
The payment method is one aspect of the term sheet that should not be overlooked. Typically, the payment sections are far more complex than just “cash at close.” Instead, they will describe a combination of elements, including cash at closing, but also other forms of payments. In some situations, they will include details regarding a loan from the seller.
The term sheet is quite beneficial as it can expedite the sales process and prevent serious misunderstandings. As a result, this non-legally binding document can begin a successful deal smoothly.
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