Introduction- A Term Sheet is a preliminary summary of the terms on which a company (or business) may be bought by the buyer from the seller.
- Often, the buyer prepares an initial draft which
- will undergo several revisions with input from both sides.
- Typically, the Term Sheet is mainly not binding.
- It may have certain parts which are binding on the buyer and the seller, for example,
- the obligation to keep confidential the information disclosed and
- the obligation for the buyer and the seller to bear their own costs for the preparation of the term sheet.
Purposes- To form a foundation for further discussion.
- As mentioned, the Term Sheet may undergo several revisions.
- The written form of the Term Sheet helps both buyer and seller see where the discussions (or negotiations) are going.
- To move the discussions (or negotiations) forward.
- Since both parties will have a copy of each revision of the Term Sheet,
- they will know if there is any backsliding or
- sudden increases in demands
- compared to earlier revisions.
- To avoid misunderstanding.
- The written form of the Term Sheet prevents
- either party from relying on any important term
- that does not appear in the Term Sheet.
- To show commitment.
- If the buyer and the seller talk and they are unable to come up with the Term Sheet,
- it is unlikely that any deal will happen between them.
- To bind the parties to certain initial commitments.
- As mentioned, both parties may agree to:
- the obligation to keep confidential the information disclosed and
- the obligation for the buyer and the seller to bear their own costs for the preparation of the term sheet.
Parts of a Term Sheet- A Term Sheet will often have the following parts:
- Date
- Parties and Object.
- The buyer,
- the seller and
- what is being sold would usually be identified.
- Structure of Transaction.
- Some where along the several revisions of the Term Sheet,
- the parties are likely to agree on the structure of the sale,
- e.g., sale of a company or
- sale of the assets.
- Costs of Preparation.
- Very often, it will be a binding term of the Term Sheet that
- the buyer and the seller will, each bear their own costs of preparing the Term Sheet.
- Confidentiality.
- Again, very often, the buyer and the seller would agree
- to keep their discussions and the information exchanged confidential.
- Land, Assets &/ Personnel.
- Significant items that form the commercial purpose of the transaction may be in the form of
- the land,
- assets and/or
- personnel of the company being sold.
- If so, these will be mentioned in the Term Sheet.
- Goodwill, Brands &/ Licences.
- Similarly, the purpose of the transaction may be to secure the
- goodwill,
- brand and/or
- licences held by the company being sold.
- If so, these will also be mentioned in the Term Sheet.
- Conditions Precedent.
- The buyer may insist on certain items to be in order before the going through with the purchase, for example,
- successfully completing due diligence,
- successfully raising funding (to pay the purchase price),
- governmental approvals,
- a certain number of years of audited financial statements,
- satisfactory representations and warranties from the seller, etc.
- Exclusive Period.
- It would be a good idea for the buyer to bind the seller
- for a specified period of time (often 90 days),
- not to approach anyone else to try to sell the same company (or business).
- Acceptance Period.
- The buyer would usually give the seller
- a specified amount of time within which to
- accept the finalized version of the Term Sheet.
Tailored Product- Ultimately, a Term Sheet is tailored to the particular buyer and seller's situation.
- A well drafted Term Sheet will
- move the parties rapidly towards a successful completion of the transaction.
- If the parties have difficulties settling the Term Sheet,
- it is best they settle those difficulties first
- before going through with the sale.
Action- The above is not legal advice and should not be considered legal advice.
- If you have any questions about Term Sheets or other issues, please feel free to call Lam & Co. at 6535 1800.
