Matthew Andrus
April 26, 2021

Understanding the Basics - Term Sheets for Business Transactions

Whether you own a startup seeking capital or you own a business that is ready to be sold, Term Sheets are likely to play an important role in your next business transaction. So, what is a Term Sheet and why should business owners learn about them?

 A Term Sheet, also known as a Letter of Intent or Memoranda of Understanding, is an agreement between a business and an investor that outlines the basic terms and conditions of an investment. The Term Sheet is used as a template for the drafting of the more detailed and legally binding documents needed to complete the transaction.

The information contained in the Term Sheet will vary depending on the transaction contemplated. Factors such as industry practice, relative bargaining powers of the parties, and the amount of information exchanged between the parties can influence what is included. However, essential elements contained in most term sheets include:

 -         A basic description of the transaction;

-         The structure of the transaction;

-         The principal deal terms;

-         Key dates;

-         Allocation of expenses;

-         Any restrictions on the public announcement of the transaction; and

-         The tax treatment for the transaction.

 It is important for both business owners and investors to seek legal counsel when drafting or negotiating a Term Sheet. Although typically nonbinding, many Term Sheets may contain provisions that are legally binding or be accompanied by correlating documents such as a Confidentiality Agreement, Nondisclosure Agreement, or an Exclusivity Agreement. Without proper legal counsel, a business owner may find themselves in violation of a legally enforceable provision or agreement which may place the entire transaction in jeopardy.

Contact us today if you have questions or would like assistance in drafting or negotiating a Term Sheet for your business.