An M&A term sheet, a term sheet in M&A practice and an acquisition term sheet are the same document under three names, and in a company sale it usually does the job an LOI does: set out the shape of a deal well enough to justify the cost of diligence. The naming varies by market and by counsel. What does not vary is which lines carry the negotiation, and price is usually not the hardest of them.
Why the names differ and the document does not
Venture financing borrowed term sheet from its own practice and the word travelled into M&A; some counsel prefer letter of intent for a company sale and heads of terms in other markets. Nothing about the document changes with the name, and a party told they are signing a term sheet rather than an LOI should read the same clauses.
Line one: the price basis rather than the price
Cash-free debt-free with a normalised working capital target. Normalised is a negotiation about an averaging period, and it is entirely possible to agree on the headline and be several hundred thousand apart when the completion accounts are drawn.
Line two: what is held back
Escrow, holdback or earn-out, with the release mechanics. Two offers with the same headline can differ by a fifth of the consideration here, and a seller reading only the top line finds that out late. Anything paid across more than one tax year also carries installment treatment.
Line three: exclusivity, which is what the seller pays
Length and extension terms. Signing removes the competition that produced the price, so a shorter window with a defined extension is worth more than a small movement on the headline. Templates default to the long end, which suits whoever wrote the template.
Questions people ask about m&a term sheet
Is a term sheet the same as an LOI?
In M&A practice, effectively yes. The naming varies by market and counsel; the clauses that bind and the lines that matter do not.
Which line is negotiated hardest?
Usually not price. The working capital basis, what is held back, and the length of exclusivity move more money.
Does a term sheet bind?
Exclusivity, confidentiality and expenses usually do. Price and structure are subject to diligence.