Term Sheet Template (Version 2)
Purpose and Rationale for a Term Sheet
You may want to use a Term Sheet to make it clear both parties, you and the seller, agree on the basic elements of a deal before spending the time and effort to conduct due diligence (the process of evaluating the contracts, accounting records, and other details of a company to assure all representations are correct). This process can be an initial test of "chemistry" between the parties to see if they can get along, negotiate reasonably, and agree on the major points of a deal.
Some consider the terms sheet to be a "mini-proposal" before investing a lot of valuable time and money investigating a deal. With a term sheet you’ll know if fundamental elements of a deal are possible and then you can move on to the small details. This is the first part of your negotiation.
You can include almost anything in the term sheet. It’s not a binding document (except, typically, for the confidentiality provisions). It’s used to establish trust among the parties and work out any large problems before drafting a purchase agreement.
View all legal templates and checklists provided by ExitAdviser.
Preamble: This term sheet sets forth the proposed terms and conditions for
[DESCRIBE THE PROPOSED TRANSACTION].
Sample Language – The purchase of all of the outstanding stock and assets of XYZ Corporation.
This term sheet is only for discussion purposes and is not intended to impose any legal obligation on any party.
1. Purchase of Interests
[NAME OF PURCHASER / INVESTOR] hereinafter the Purchaser would acquire from [COMPANY MAKING PROPOSAL] hereinafter the Company, the following properties and assets:
[LIST PROPERTY OR ASSETS TO BE PURCHASED]
Sample Language – "Stock": All of the outstanding common and preferred stock of XYZ Corporation.
Sample Language – Assets: The following assets of of XYZ Corporation:
- Asset #1
- Asset #2
- Asset #3
The properties and assets purchased will be hereinafter referred to as the Purchased Interests.
2. Purchase Price and Terms
In consideration for the transfer and sale by the Company of the Purchased Interests to Purchaser, Purchaser would pay [INSERT PURCHASE PRICE] to the Company.
The payment terms would be as follows:
[INSERT PAYMENT TERMS]
Sample Language – "Cash at Closing"
The entire purchase price will be paid in cash at the time of closing. Seller will provide bank wire details no later than five business days prior to the closing date.
Sample Language – "Earn-outs"
The cash down payment will be [ ]% of the Purchase Price. Earn-outs will be paid as follows:
[ ]% will be paid one year after the closing date subject to revenue achievement of [ ]% of the revenue projection provided by the Company and EBITDA equal to or exceeding [ ]%. The remaining [ ]% will be paid within two years of the closing date subject to revenue achievement of [ ]% of the revenue projections provided by the Company and EBITDA equal to or exceeding
Sample Language – "Seller Financing"
The purchase price will be paid at the tine of closing, the form of:
[ ]% of the purchase price will be paid in cash.
[ ]% of the purchase price will be paid with a promissory note payable to the Seller within [ ] months of the closing date, bearing interest at no less than [ ]% per annum.
Sample Language – "Escrow"
Buyer will deposit with the Seller or Seller's Escrow Agent the sum of $[ ], (hereinafter referred to as "Earnest Money") as earnest money and a partial payment of the Purchase Price. Seller or Seller's Escrow Agent shall, at such closing, deliver to Seller the Earnest Money, and Buyer shall be given credit toward the purchase price for the payment of the Earnest Money. In the event that the closing does not occur, Buyer's deposited earnest money should be returned to Buyer.
Sample Language – "Price Changes"
At the closing date Purchaser will receive the assets and stock of the company along with all inventory, accounts receivable, and working capital. Should the net value of inventory, accounts receivable, and working capital decrease by more than [ ]% between the date of this term sheet and the closing date, the Purchaser will have the right to reduce the purchase price by [ ]%.
Sample Language – "Accounts Receivable"
At the closing date Purchase will own all accounts receivable and Seller will use its best efforts to assist Purchaser in collection of such accounts for a period not to exceed[ ]days after the closing date.
3. Client Transition
Seller will provide Purchaser reasonable transition assistance regarding existing customers at no cost for a period not to exceed [ ] days after the closing date. Such assistance shall include:
[LIST SPECIFIC ASSISTANCE ACTIVITIES]
Sample Language – "Client Transition"
The Seller will contact the list of companies listed on an Exhibit to the final purchase and sale agreement and engages in the following activities:
Sample Language – "Payment for transition assistance"
Purchaser will compensate Seller on a time and materials basis for any transition assistance. A schedule for such fees shall be an exhibit to the final purchase and sale agreement.
4. Non-Competition / Non-Solicit
Sample Language 1: After the closing date, for a period of [ ] years, the Seller will not directly or indirectly engage in any business competitive with Purchaser. This covenant shall apply to the geographical area that includes all of the [ ].
Sample Language 2: After the closing date, for a period of [ ] years, the Seller will not directly or indirectly solicit or engage any current client of Company for any business competitive with Purchaser. The list of clients subject to this paragraph will accompany any final purchase and sale agreement.
Sample Language 3: The Seller and its key employees (as defined in an exhibit in the final Purchase and Sale agreement) agree not to solicit any of the employees of Purchaser for a period of [ ] years from the closing date.
Sample Language 1: The Company agrees that from the date hereof until the Closing Date, the Company shall neither directly nor indirectly, through brokers, agents or otherwise, solicit or accept offers or conduct negotiations or enter into contracts with respect to the Purchased Interests or a Replacement Transaction. Should the Company receive an unsolicited offer relating to the Purchased Interests, it will promptly refuse such offer and inform Purchaser in writing.
6. Key Employees
Seller and Purchaser agree that certain key employees are critical to the operation of the business. The parties will incorporate the following provisions into the final purchase and sale agreement:
Sample Language – "Employment Agreements"
Purchaser will offer employment agreements on terms reasonably acceptable to the key employees listed on an exhibit in the purchase and sale agreement. Acceptance by the key employees will not be required to effectuate the final sale of the business.
Sample Language – "Stock Options / Other compensation"
Purchaser will offer key employees (listed on an exhibit in the purchase and sale agreement) stock options at or other compensation valued at no less than $[ ] to secure their future employment. Acceptance by the key employees will not be required to effectuate the final sale of the business.
7. Due Diligence
Sample Language 1: Purchaser will be given an option to conduct due diligence on the Seller’s business,software, historical and projected financials, legal contracts with customers and vendors, real estate or equipment leases, operational and quality procedures, marketing strategy, tax compliance, and human resource materials.
The result of the due diligence must be satisfactory to the Purchaser before the closing date.
8. Accounts Receivable
Sample Language – "Accounts Receivable Belong to Purchaser"
The accounts receivable will be documented on a schedule attached and incorporated into the final purchase and sale agreement. As of the closing date, all accounts receivable will be the property of the Purchaser and the Purchaser will have sole responsibility for collections.
Sample Language – "Discount for Uncollected Accounts Receivable"
Any accounts aged over [ ] days at the time of closing will be discounted by [ ] % and will reduce the purchase price by the same amount.
9. Representations and Warranties
- (a) The Purchaser and Company will comply with applicable laws in the performance of above transaction;
- (b) Each Party will bear its own costs and fees associated with due diligence and all other costs arising out of performance under this Term Sheet.
- (c) Company has good title and ownership over the Purchased Interests;
- (d) Company guarantees that the Purchased Interests is free from any obligation and defects.
- (e) There is no pending Proceeding that has been commenced against Company and the Purchaser that challenges, or may have the effect of preventing, delaying, making illegal or otherwise interfering with, any of the Contemplated Transactions.
- (f) This agreement will be governed by the laws of [ ].
Sample Language – "Purchase Contingencies - Financing"
The Purchaser will have [ ] days from the effective date of this term sheet to obtain financing suitable to complete the purchase. The Seller may extend this deadline in writing.
Sample Language – "Purchase Contingencies – Due Diligence"
Seller will provide all reasonable documentation to the Purchaser needed for due diligence no later than [ ] days before the Closing Date. Purchaser may terminate this term sheet after [ ] written notice to Seller for failure to provide requested documentation.
Sample Language – "Purchase Contingencies – Regulatory Approval"
Purchaser will require regulatory approval before completing the purchase. Should the Purchaser fail to obtain the required regulatory approval within [ ] days of the Closing Date this term sheet will terminate.
11. Closing Date / Sunset Date / Termination
The necessary steps to reach a closing (the "Closing") will be completed by _________________ (the "Closing Date"). Closing Date may be subjected to extension or postponement by mutual agreement of the parties. This Term Sheet will expire on _________________. Either party may terminate this agreement by sending written notice to the address specified below.
12. Deliveries at Closing
[INSERT NAMES OF DOCUMENTS / AGREEMENTS REQUIRED TO BE PRODUCED BY PARTIES]
Sample Language – "Documents at Closing"
- All contracts
- Three years of company financial statements
- All bank statements for the prior three years
- A valid and binding Bill of Sale
- Corporate resolutions authorize purchase of the company
13. Governing Law
This term sheet shall be governed by and construed in accordance with the laws of the state of _________________.
Sample Language – "Alternative Dispute Resolution"
Dispute Resolution. If any dispute, controversy, or claim arises between the parties that cannot be resolved informally, the parties will first submit to Mediation with a mutually agreeable neutral. If Mediation is unsuccessful, the Parties agree the dispute will be submitted to a binding arbitration in accordance with the rules of the American Arbitration Association under the laws of the State of [ ].
14. Accounting Matters
Company’s Accountant will prepare financial statements in accordance with GAAP. The financial statements of the company will be audited prior to closing.
The terms and conditions of this Term Sheet shall be held confidential by the parties. The parties agree that there will be no press release or other public statement issued by either party relating to this Term Sheet, unless required by law. If either party determines that it is required by law to make such a public disclosure, it shall consult with the other party prior to such disclosure and cooperate with the other party to seek to avoid or minimize such disclosure. Confidentiality: Neither this Term Sheet nor its substance, nor any information disclosed by Seller to Purchaser shall be disclosed publicly or privately by Purchaser, except with the written consent of Seller or as otherwise required by law. If Purchaser determines that it is required by law to make such disclosure, Purchaser shall consult with Seller prior to such disclosure.
- Purchase of Interest: Typically a purchaser will want to acquire the assets of a company there is often less liability and few complications with this type of transaction. Sometimes, it makes sense for the acquiring company to purchase the stock of your company. In either case, this paragraph should completely state the types of items being acquired during the sale (stock, assets, etc.)
- Price: Price is naturally one of the biggest negotiating points and so it’s natural that this is one of the focal areas of a term sheet. It’s a good idea to include a few short paragraphs outlining how you arrived at the valuation, or purchase price, you’re asking for your company. Some typical models include: a multiple of EBITDA (Earnings Before Interest, Taxes, and Depreciation), or a multiple of revenue. Whatever formula you choose make sure it is based on facts and backed up by real numbers.
- Payment Terms: There is a great deal of flexibility when creating the payment terms for the purchase. A "cash at closing" deal is common where the entire purchase amount is paid on the closing date. Other transactions have "built-in" provisions to ensure company performance. These are typically called "earn-outs" – meaning that if certain milestones are achieved, additional payments are made a certain intervals. A third way to structure a deal is to provide seller financing. This means that a portion of the purchase price is paid at closing, and the remainder takes the form of a promissory note signed by the purchaser promising to pay the seller the balance of the purchase price at some later date.
- Client Transition: It’s common, especially with small to medium sized companies, to require some sort of assistance transitioning clients to new ownership. These activities might involve personal introductions, assistance with contract changes or even billing practices, It’s important to understand up front each party’s willingness to assist in this regard and so a paragraph is included in the term sheet to lay out each parties responsibilities and whether or not there will be compensation provided for these efforts.
- Non-Competition / Non-Solicit: In nearly every transaction involving the sale of a business the purchaser wants assurances that the previous owners will not immediately enter into the marketplace and user their know-how to compete with the newly acquired business. Non-Competition provisions provide protections such that previous owners cannot engage in the same or similar business for a certain period of time or within a certain geography (or both). Non-Solicit provisions accomplish a similar goal in that they prevent previous owners from soliciting for employment the employees who will remain and run the purchased business. These paragraphs may also prevent the "old" owners from reaching out and soliciting their previous customers.
- Exclusivity: Purchasers typically do not want to compete with other potential suitors when buying a business. Exclusivity language binds the seller such that it may not entertain offers from other Purchasers within a given time period. This type of provision is understandable since a large amount of time, effort and expense is spent in the due diligence and negotiation process.
- Key Employees: Key employees are often the most valuable asset being acquired in a transaction. Their presence and continued enthusiasm can be the difference between a successful transition to a new owners and a failed one. There are several ways to make sure key employees remain with the company. In certain case cases it may be preferable to base the completion of a deal on successfully negotiating employment agreements with key employees. In other cases, it may be enough to compensate them monetarily (with increase salary, bonuses, or stock options). The goal in each case is to obtain commitments to stay long enough with the acquired business to ensure a successful transition to new ownership.
- Due Diligence: It’s only fair to allow a purchaser an opportunity to inspect the key documents and data that make up a company’s financial profile. The process of due diligence involves giving access to this data in a way the purchaser can inspect it and become comfortable that the data is accurate. It’s also important to allow enough time for the process to complete. The larger the transaction the more time that should be allowed for due diligence.
- Accounts Receivable: Accounts receivable make up the outstanding amounts owed to a company by their clients. In some transactions these accounts become the property of the purchaser, in others they remain with the seller. The reason is collectability. It’s often the case the seller is better equipped to collect these amounts than the purchaser. However, accounts receivable can represent a large amount of money. Accordingly there are several ways to deal with them in a transaction.
- Contingencies: Contingency clauses provide the parties a way to back out of a transaction that is no longer feasible. Reasons might include: inability to secure financing, a change in market circumstances, the death of a key employee, the loss of an important client, etc. While the exact details of such contingencies are spelled out in the purchase and sale agreement, the Term Sheet can contain the broad outline of the parties desires in this regard.
- Closing Date / Sunset Date / Termination: Although a closing date may shift as a deal progresses, a term sheet should layout at least a preliminary date when the parties anticipate closing the transaction. Furthermore, there should also be a termination date, or "sunset" to the Term Sheet itself. It’s usually not the intention of either party that the offers made in a Term Sheet continue forever, particularly if a company anticipates multiple offers from other suitors. Additionally, there should be a provision to terminate the Term Sheet offer out of convenience. A party may be unhappy with the progression of the deal, or may lose their ability to execute such a transaction and this allows them to terminate the negotiation process.
- Deliveries at Closing: It’s important to understand up front what documents are needed to effectively close a sale. It may be as simple as the seller providing a valid bill of sale for the business. There may also be other parties whose permission is required to effectuate a transfer. There might be final bank statements or accounting records reflecting the financial state of the business. Think about what documents you might need as a purchaser to satisfy you that you are getting a clean, enforceable transfer of all the items you’re paying for.
- Governing Law: It’s unusual for a Term Sheet negotiation to end up in litigation, but just in case you should think about what country, or what state’s laws will govern any disputes you may have over the term sheet.
- Confidentiality: Confidentiality is one of only a few items on a term sheet that is legally binding and generally persists after a Term Sheet is finished or terminated. It governs not only confidential information about the other party that may be acquired during negotiations, but also any publicity about the deal itself. Make sure to carefully review this paragraph to make sure it accomplishes exactly what you want.
Download this document for $22
Or download the full collection (30+ files) of documents for $59