Glossary
Glossary
A term sheet is a non-binding document that outlines the key commercial terms and structure of a proposed M&A transaction — including purchase price, deal structure, representations and warranties expectations, conditions to close, and exclusivity provisions. It serves as the foundation for the definitive purchase agreement that follows, and represents the point at which both parties have reached sufficient alignment on the headline economics to commit to a more formal negotiation process.
The term sheet serves a specific and practical function: it forces both parties to articulate and agree on the most important deal terms before either side invests the time and cost of full legal documentation. A purchase agreement in a mid-market transaction can run to hundreds of pages. Negotiating that document without first aligning on the headline terms is an expensive way to discover that the parties were never actually on the same page about price, structure, or risk allocation.
By surfacing and resolving the major commercial issues upfront — in a short, plain-language document — the term sheet substantially reduces the risk of a deal falling apart late in the process, when the costs of failure are highest.
It also marks an important psychological transition in the deal. Before a term sheet, the buyer is evaluating and the seller is considering. After a term sheet is signed, both parties have made a visible, if non-binding, commitment to work toward close. That shift in posture changes the dynamic of every subsequent conversation.
Term sheets vary in length and detail depending on deal complexity, but most cover the same core elements:
Purchase price and structure:The headline consideration — whether cash at close, stock, seller financing, or some combination — and the enterprise value or equity value basis on which it is calculated. Any working capital adjustment mechanism or peg is typically referenced here, even if the specific methodology is negotiated later.
Earnout provisions: If any portion of the purchase price is contingent on post-close performance, the term sheet will outline the earnout structure: the metric being measured, the timeframe, and the potential additional consideration. Earnout terms are among the most negotiated elements in mid-market deals and benefit from being clearly framed early.
Transaction structure: Whether the deal is structured as a stock purchase, asset purchase, or merger — a distinction that has significant tax, liability, and operational implications for both parties.
Representations, warranties, and indemnification: High-level parameters around the scope and survival period of seller representations, and the indemnification structure that will govern post-close claims. The term sheet rarely specifies every rep and warranty, but it typically establishes the framework — caps, baskets, survival periods — that will be negotiated in the purchase agreement.
Conditions to close: Any material conditions that must be satisfied before the transaction can complete — regulatory approvals, third-party consents, financing conditions, or the resolution of specific diligence findings.
Exclusivity: The period during which the seller agrees not to solicit or engage with competing buyers — typically 30 to 60 days — giving the acquirer the runway to complete diligence and finalize the purchase agreement without competitive pressure. Exclusivity is one of the most strategically significant provisions in the term sheet for the buyer.
Confidentiality and no-shop: Provisions that govern how the term sheet itself is treated, and what the seller can and cannot do with respect to other potential buyers during the exclusivity period.
Timing and process: Expected milestones for diligence completion, purchase agreement negotiation, and close — giving both parties a shared framework for managing the remaining stages of the process.
In practice, the terms are often used interchangeably, and the distinction is more semantic than structural. Both are non-binding documents that outline proposed deal terms before the definitive agreement is drafted.
Where a distinction is drawn, it typically reflects emphasis: a Letter of Intent (LOI) tends to be more formal and comprehensive, closer in structure to a short purchase agreement, while a term sheet is often more concise, presenting the key commercial terms in a summary or table format without extensive prose. Some practitioners use LOI specifically in the context of an offer being made to a seller, and term sheet in the context of a document negotiated between parties who are already broadly aligned.
What matters in practice is less the label and more the content: does the document clearly articulate the commercial terms both parties are committing to negotiate toward, and does it include a binding exclusivity provision that protects the buyer's investment in the diligence process?
Generally, no — with two important exceptions. The substantive commercial terms in a term sheet are explicitly non-binding: neither party is legally obligated to complete the transaction on the terms outlined, or at all.
However, specific provisions within the term sheet are typically carved out as binding. Exclusivity is the most significant: the seller's commitment not to solicit or engage competing buyers for the defined period is almost always intended to be enforceable. Confidentiality provisions governing the treatment of the term sheet itself are also typically binding.
This structure — non-binding on the deal, binding on the process — reflects the commercial reality of where the parties are. They have agreed enough to stop shopping the deal and start doing the work of getting to close, but neither party wants to be legally committed to a transaction before diligence is complete and the purchase agreement is negotiated.
The practical implication is that either party can walk away from a term sheet without legal liability on the substantive deal terms — though doing so after exclusivity has been granted, and after the other party has invested significantly in diligence, carries obvious reputational and relationship consequences.
While every deal has its own dynamics, certain term sheet provisions generate the most consistent negotiating friction:
Purchase price and working capital peg: The headline number gets most of the attention, but the working capital mechanism — how the final price adjusts based on the actual working capital delivered at close versus a normalized target — can move the effective price by a meaningful amount. Sellers often underestimate the significance of working capital negotiations; experienced buyers do not.
Earnout structure: When part of the consideration is contingent on future performance, both parties have structurally different incentives: the seller wants an earnout that is achievable and measured on metrics they control; the buyer wants an earnout that reflects genuine value creation and protects against overpayment for performance that does not materialize. The specific metric, measurement period, and any post-close operating covenants are all intensely negotiated.
Indemnification caps and baskets: The maximum amount the seller can be required to pay for post-close indemnification claims, and the minimum threshold below which claims are not made, directly affect how much risk the seller retains after close. These are rarely agreed on the first exchange and often require advisor intervention to bridge.
Exclusivity period length: Sellers want exclusivity to be as short as possible — limiting the time they are off the market without certainty of close. Buyers want enough runway to complete diligence and negotiate the purchase agreement without time pressure. Thirty to sixty days is typical; complex deals sometimes require more.
The term sheet is the moment where the buyer's negotiating leverage is typically at its highest — before exclusivity is granted, while the seller still perceives competitive risk. Several principles consistently produce better outcomes for acquirers:
Anchor on the terms that matter most. Not every term sheet provision deserves equal attention. Decide in advance which elements are non-negotiable — price, structure, exclusivity length — and which you are willing to trade. Trading concessions on less important terms to protect the ones that matter is basic negotiating discipline, but it requires knowing your priorities before you enter the conversation.
Be specific about working capital. Vague working capital language in a term sheet creates expensive arguments later. The more precisely the mechanism is defined at term sheet stage, the less room there is for disagreement when the closing accounts are prepared.
Move quickly. A term sheet that takes three weeks to negotiate signals either disorganization or bad faith to a seller who has options. Buyers who move with speed and decisiveness after management presentations consistently get better terms than those who deliberate.
Think ahead to the purchase agreement. Every term sheet provision creates a negotiating precedent for the purchase agreement that follows. Agreeing to aggressive indemnification caps in the term sheet makes them very difficult to reopen in the definitive document. Treat the term sheet as the first draft of the deal, not a preliminary courtesy.
A term sheet is a non-binding document that establishes the key commercial terms of a proposed acquisition — price, structure, exclusivity, and risk allocation framework — before the definitive purchase agreement is drafted. It is non-binding on the deal but typically binding on exclusivity and confidentiality.
The term sheet is the point of highest negotiating leverage for the buyer and the most important moment to resolve the commercial issues that, if left ambiguous, will generate friction and cost in the purchase agreement negotiation that follows.
Midaxo tracks deal stage progression through term sheet and exclusivity within the pipeline CRM, maintaining full deal context as the transaction moves from active pursuit into due diligence and close.