M&A Term Sheet Guide

Master M&A Term Sheets
Structure Your Deal Right

Everything you need to know about drafting, negotiating, and finalizing term sheets for mergers and acquisitions-with interactive tools and expert templates.

Alex Lubyansky on every deal • Same framework used across all transactions

Term Sheet vs LOI Critical Components Full Template Negotiation Strategies Industry-Specific Post-Term Sheet Common Pitfalls
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6-12
Pages Typical
Term Sheet Length
60-90
Days to Close
After Term Sheet
5
Core Components
Every Term Sheet
6
Major Pitfalls
To Avoid

What Is an M&A Term Sheet?

A term sheet is a detailed outline of the key terms and conditions for a proposed merger or acquisition. More technical than an LOI, term sheets focus on deal mechanics and serve as the basis for drafting definitive agreements. While mostly non-binding, certain provisions (confidentiality, exclusivity, expenses) are typically binding.

Term Sheet vs. LOI: Understanding the Difference

While often used interchangeably, term sheets and LOIs serve different purposes in M&A transactions:

Term Sheet

  • More detailed and technical
  • Focus on deal mechanics
  • Often in outline format
  • Used by lawyers and advisors
  • Basis for definitive agreements

Letter of Intent (LOI)

  • More narrative and accessible
  • Business-level summary
  • Letter format
  • Understood by all parties
  • Initial agreement framework

Need an LOI instead? Check our comprehensive LOI guide and use our LOI Generator tool.

Critical Term Sheet Components

1. Transaction Structure

The foundation of your deal. Use our Deal Structure Optimizer to determine the most tax-efficient approach:

  • Asset Purchase: Buyer acquires specific assets and liabilities
  • Stock Purchase: Buyer acquires ownership of entire entity
  • Merger: Two entities combine into one
  • Reorganization: Tax-free exchange structures

2. Purchase Price and Consideration

Price Components

  • Base Purchase Price: Fixed amount or formula
  • Adjustments:
    • Working capital (use our calculator)
    • Debt and cash adjustments
    • Closing date proration
  • Earnouts: Performance-based payments
  • Escrow: Holdback for indemnification

3. Representations and Warranties

Key seller statements about the business that form the basis for buyer's purchase decision:

Fundamental Reps

  • Organization and authority
  • Ownership of shares/assets
  • No conflicts or consents
  • Broker fees

Business Reps

  • Financial statements
  • Tax compliance
  • Material contracts
  • Litigation
  • Intellectual property
  • Employee matters

4. Indemnification Provisions

Protections against breaches and undisclosed liabilities. Assess your negotiation leverage with our Negotiation Analyzer:

  • Survival Periods: How long claims can be made
  • Caps: Maximum indemnification amount
  • Baskets/Deductibles: Minimum claim thresholds
  • Escrow Terms: Holdback amount and duration

5. Conditions to Closing

Standard Conditions

  • ✓ Accuracy of representations and warranties
  • ✓ Performance of covenants
  • ✓ No material adverse change (MAC)
  • ✓ Third-party consents obtained
  • ✓ Regulatory approvals (HSR, etc.)
  • ✓ Financing obtained (if applicable)
  • ✓ Key employee retention

Term Sheet Negotiation Strategies

For Buyers: Maximizing Protection

  1. Start Conservative: Build in adjustment mechanisms
  2. Layer Protections: Multiple indemnification sources
  3. Extend Timelines: Adequate due diligence periods
  4. Define Clearly: Specific MAC definitions
  5. Secure Remedies: Meaningful escrow amounts

Use our Price Negotiation Calculator to model different scenarios and find your walk-away point.

For Sellers: Maximizing Value

  1. Limit Liability: Cap indemnification exposure
  2. Accelerate Closing: Shorter due diligence periods
  3. Knowledge Qualifiers: Limit reps to actual knowledge
  4. Reduce Escrow: Minimize holdback amounts
  5. Narrow MAC: Specific carve-outs and exceptions

Industry-Specific Term Sheet Considerations

Technology Companies

  • IP Assignment: Comprehensive transfer mechanisms
  • Open Source: Compliance and license review
  • Key Personnel: Retention bonuses and vesting
  • Code Escrow: Source code protection
  • SaaS Metrics: ARR/MRR earnout triggers

Manufacturing Businesses

  • Environmental: Phase I/II assessments
  • Product Liability: Historical claim treatment
  • Inventory: Valuation and obsolescence
  • Equipment: Condition and maintenance
  • Supply Chain: Contract transferability

Service Companies

  • Customer Retention: Revenue-based earnouts
  • Non-Competes: Geographic and time scope
  • Transition Services: Post-closing support
  • Employee Transfer: Benefits continuation
  • Contract Assignment: Client consents

Post-Term Sheet Process

Once your term sheet is signed, follow our proven roadmap. Track progress with our Timeline Tracker:

Typical Timeline (60-90 Days)

  • Days 1-5: Execute term sheet and begin due diligence
  • Days 5-30: Complete due diligence (use our tracker)
  • Days 20-45: Draft and negotiate purchase agreement
  • Days 30-60: Obtain third-party consents and approvals
  • Days 45-75: Finalize financing arrangements
  • Days 60-90: Complete closing conditions and close

For detailed guidance, see our complete post-LOI roadmap.

Common Term Sheet Pitfalls

Avoid These Mistakes

  1. Ambiguous Language: Terms subject to interpretation
  2. Missing Definitions: Key concepts undefined
  3. Inconsistent Terms: Conflicts between sections
  4. Inadequate Conditions: Missing critical protections
  5. Tax Blind Spots: Not optimizing structure early
  6. Unrealistic Timelines: Insufficient time for tasks

Term Sheet Best Practices

Documentation Tips

  • Be Specific: Define all material terms clearly
  • Use Examples: Illustrate complex calculations
  • Include Exhibits: Attach key schedules and forms
  • Version Control: Track all changes and iterations
  • Get Input Early: Involve advisors from the start

Negotiation Tactics

  • Trade-offs: Give on some points to win others
  • Precedent: Reference market standards
  • Optionality: Build in alternative structures
  • Deadlines: Create urgency appropriately
  • Walk-away: Know your limits in advance

Sample Term Sheet Provisions

Working Capital Adjustment Example

"Purchase Price shall be adjusted dollar-for-dollar based on the difference between: (a) Actual Working Capital at Closing, and (b) Target Working Capital of $[X] Where Working Capital = Current Assets - Current Liabilities (excluding cash, debt, and tax assets/liabilities) Adjustment to be determined within 60 days post-closing Disputes resolved by independent accountant"

Earnout Provision Example

"Additional consideration of up to $[X] based on: - Year 1: $[X] if EBITDA ≥ $[Y] - Year 2: $[X] if EBITDA ≥ $[Y] - Year 3: $[X] if EBITDA ≥ $[Y] EBITDA calculated consistent with past practice Seller consultation rights on material decisions Acceleration upon change of control"

Full Term Sheet Document Template

Below is a complete term sheet skeleton you can adapt for your transaction. It mirrors the structure our attorneys use when drafting term sheets for clients, organized so both sides can find price, protections, and closing conditions without wading through legal boilerplate.

"TERM SHEET [DATE] CONFIDENTIAL PARTIES: [BUYER] proposes to acquire [COMPANY] for $[PRICE], subject to the terms below. PURCHASE PRICE: $[TOTAL] - Cash at Closing: $[AMOUNT] ([%]) - Seller Note: $[AMOUNT] ([%], [YEARS] years, [%] interest) - Earnout: Up to $[AMOUNT], based on: Year 1: $[X] if revenue exceeds $[Y] Year 2: $[X] if EBITDA exceeds $[Y] DEPOSIT AND TIMELINE: - $[DEPOSIT] deposit within [X] business days of signing - Target closing within [DAYS] days - [SELLER NAME] transitions to [ROLE/EXIT TIMELINE] ASSETS RETAINED BY SELLER: - Cash and cash equivalents on hand - Personal vehicles, even if titled to the company - Life insurance policies - [OTHER SPECIFIC EXCLUSIONS] BUYER PROTECTIONS: - Escrow: [%] of purchase price, held [MONTHS] months - Indemnification survival period: [MONTHS] months - Indemnification cap: $[X] - Mutual termination rights if closing conditions are not met TRANSITION SUPPORT: - Consulting period: [MONTHS] months at $[RATE]/month - Continued health insurance for [PERIOD] - Office and email access for [PERIOD] DUE DILIGENCE: - [X]-day exclusive due diligence period - Confirmatory diligence only, scoped to items disclosed in this term sheet - Seller continues operating the business in the ordinary course CLOSING CONDITIONS: - Standard representations and warranties - No material adverse change - Retention of key employees identified in Exhibit [X] - Receipt of necessary third-party approvals and consents EXPIRATION: This term sheet expires at 5:00 PM [TIMEZONE] on [DATE] unless extended in writing by both parties. ACCEPTED AND AGREED: ___________________ Date: _______ [SELLER NAME] ___________________ Date: _______ [BUYER NAME]"

Advanced Term Sheet Provisions for Complex Deals

Standard term sheet language does not always fit unusual deal structures. These provisions address scenarios that come up often enough to warrant standard language.

Multiple Sellers or Partners

A drag-along provision keeps a minority owner from blocking a sale the majority has approved.

"Upon approval by shareholders holding [75]% of outstanding shares, all shareholders must sell on the same terms, with [10] days' notice."

Distressed Situations

Stalking horse language protects a buyer's diligence investment if the deal moves to auction.

"Buyer is entitled to a break fee of [3]% of purchase price plus expense reimbursement if outbid in a subsequent bankruptcy auction."

Roll-Up Acquisitions

A platform provision gives the seller ongoing upside when they roll equity into the acquiring entity.

"Seller receives [20]% equity in NewCo, tag-along rights, and a board observation seat."

International Deals

Currency protection language allocates foreign exchange risk between signing and closing.

"Purchase price is adjusted for currency movements exceeding [5]% between signing and closing."

Get Your Term Sheet Reviewed by M&A Counsel

Term sheets set the foundation for your entire deal. Senior attorney Alex Lubyansky personally reviews every term sheet personally.

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