A well-drafted term sheet can save time and money when negotiating a sale agreement.
Why do you need a term sheet?
Term sheets are an important step to include in your transaction timeline. They set the foundations upon which the transaction agreement is based. It can prevent a transaction from falling over, by giving the parties a clear understanding of the important commercial terms and a roadmap for the deal to follow. They provide certainty around key dates, which conditions will be satisfied and when the deal will be completed.
By taking the time to document each party’s essential terms, you can thrash out any issues that will be a deal-breaker early on.
A term sheet also makes it difficult for key commercial terms to be renegotiated later, because anything in writing is difficult to refute.
When should you enter into a term sheet?
A term sheet should be drafted and signed once you’ve had the commercial discussions and agreed the critical and major terms of the transaction. Doing this before getting the lawyers to prepare the transaction documents gives clarity on what should be included in those documents.
Are term sheets legally binding?
Generally, term sheets are not legally binding but there are some exceptions which I discuss below. Even if they’re not binding, a term sheet is still worthwhile because (as flagged above), they give you a clear understanding of the key commercial terms of the agreement before you start incurring significant legal fees. If your intention is that the term sheet is not binding, it needs to be expressly stated that it is non-binding and not an offer capable of acceptance. There have been cases where failure to do this properly has resulted in a tax liability for the seller.
What should your term sheet include?
Your term sheet should include all the obvious things like:
Generally, all of the above terms will be drafted in the term sheet as non-binding.
Your term sheet should also include the following additional provisions:
If you’re considering entering into a transaction or want to draft a term sheet, we have an experienced team of transaction lawyers who specialise in financial services. Get in touch, we’d be happy to help.