What is a term sheet?

A term sheet is a document used at the start of negotiations between the buyer and seller. The document is mainly used in the world of investors who invest in start-ups and scale-ups (venture capital), but has also found its way into (online business) acquisitions. In this article we explain the advantages and disadvantages of the term sheet and which pitfalls you should avoid.

When do you use a term sheet?

In the case of a takeover, the offer process usually proceeds as follows: the seller of an online business, website or other type of business places a sales profile on Businessforsale.eu. Interested parties read this anonymous profile and decide to contact us by confirming a non-disclosure agreement. The seller confirms this and thus opens, as it were, the contact between both parties.

The buyer can now see which company it is. If the seller has been smart, he or she has already prepared a sales memorandum and added that document together with additional documentation (annual reports for example) to his or her account on Businessforsale.eu. The buyer can now efficiently get a quick picture of the company for sale. Buyers who are still interested after reviewing the sales memorandum will contact the seller.

The subsequent contact moments can take place partly via the inbox of your Businessforsale account (for asking questions) and additionally via an introductory call and a possible follow-up call. Since the mid-2020s, we see that many of these conversations take place via video conferencing, and this works very well.

In most cases, the seller will be in discussions with multiple buyers, and the seller will therefore like to see buyers make an indicative offer as soon as possible after going through the memorandum. After the potential buyer's questions have been answered, the seller can ask him or her to confirm his or her indicative bid by preparing and sending the seller a term sheet.

Term sheet - The form and structure

A term sheet (also known as a "condition letter") is usually several pages in size and contains, point by point, a buyer's most important conditions for achieving a business acquisition. It is a detailed offer from the buyer and is a basis on which further negotiations can take place toward signing an actual acquisition agreement (in between, a letter of intent may be signed first). For the seller, the term sheet gives more guidance and it also makes comparing different bids easier and clearer.

Like the indicative bid, the term sheet is in principle not yet binding (though it is important that the potential buyer mentions this in the term sheet he or she sends).

The term sheet contains (just like a regular letter):

- A sender and a recipient

- The explicit designation of the bidder and its authorized representatives

- The date and place of formatting and mailing

- And the signature of the bidder

The term sheet shall include conditions relating to:

- A description of the assets or shares subject to the bid

- The acquisition fee offered

- Method of financing with any caveats

- The time period in which the bid is valid and the time period in which it would be desired to complete the acquisition

- Reservations regarding execution and outcome of due diligence

- Other terms, conditions and reservations that the buyer attaches to the bid made

- Applicable law and competent court

Advantages and disadvantages of a term sheet

Although the idea of the term sheet is that it is not binding, it is important to handle it carefully: after all, the document will form the basis for further negotiations. Things that are not properly worded, conditions to the bid that are not mentioned or other awkwardness can cost you dearly at a later stage. It is therefore important to think carefully about the term sheet and not to make any choices that do not need to be made at this stage. If desired, it is of course always possible to have a lawyer look at this stage.

On the other hand, the term sheet provides clarity quickly and efficiently. For both buyers and sellers, the term sheet provides guidance for follow-up steps, with the seller also having the advantage that a better-founded preference can be expressed for one of the parties on the basis of the term sheets received.

The term sheet and statement of intent (LOI).

So to be clear, the term sheet comes up earlier in the sales process than the LOI and really has a different function. The term sheet therefore has a lower level of binding and the level of detail is a lot lower. After receiving the term sheet, negotiations and fine-tuning usually take place before the parties agree on the exact terms in an acquisition.

Only at that point will a letter of intent be signed: the letter of intent or LOI. So the content of the deal has been agreed upon; only the due diligence will have to show whether the picture painted by the seller actually corresponds to reality. Without too many deviations, the LOI will be virtually identical in content to the final acquisition agreement with which the company is transferred: the level of detail of an LOI is therefore much higher than that of a term sheet, and although buyers can still get out of a transaction after signing an LOI, the degree of commitment is higher.