The value of the initial offer via a term sheet shouldn’t be overlooked. From buyers and sellers to advisors and intermediaries, the term sheet is often used before the creation of an actual purchase or sale agreement. That stated, it is important that the term sheet is actually explained in detail. Let’s take a closer look at its importance.
What is a Term Sheet?
Even though term sheets are quite important, they are rarely mentioned in books about the M&A process. A term sheet can be defined as “Stating an initial high-level offer with a basic structure of the deal and whether or not it includes real estate.”
Another way of looking at a term sheet, is that a term sheet serves to answer four key questions: Who? What? Where? And How Much?
Creating the Right Environment
At the end of the day, if a buyer and a seller have a verbal agreement on price and terms, then it can be decided whether or not to spend additional time putting the deal together. The term sheet functions to help both parties, as well as their respective advisors, begin to shape a deal, taking it from verbal discussions to the next level.
Make Sure Your Term Sheet Has the Right Components
In the end, a term sheet is basically a preliminary proposal/offer containing a variety of key information. The term sheet outlines the price, as well as the terms and any major considerations. Major considerations can include everything from consulting and employment agreements to covenants not to compete.
Term sheets are a valuable tool and when used in a judicious fashion, they can yield impressive results and help to streamline the buying and selling process. Through the proper use of term sheets, an array of misunderstandings can be avoided and this, in turn, can help increase the chances of successfully finalizing a deal. If the initial offer of price and basic terms can be agreed to, the next step is to complete the actual Asset Purchase Agreement.