What is a Term Sheet and why do you need one?

A Term Sheet sets out what’s included in your business sale, before you enter into a formal contract. It should detail what you’re selling, what the buyer is buying and any other specifics of the sale.

It’s also known as a Heads of Agreement (HOA), Memorandum of Understanding, or a Letter of Intent.

When do you need a term sheet?

When a buyer is seriously interested in your business, they’ve seen your Information Memorandum and want to talk specifics about the sale, it’s time to put things on paper.

Why do you need a term sheet?

A Term Sheet makes it clear what is being bought and sold and helps business sellers and buyers talk about prices and conditions with a common understanding of what’s included. It’s not the same as a final sales contract though. It’s only used to help keep the sales process moving while negotiations are still underway, but doesn’t necessarily bind the seller and buyer into a legal arrangement. This means that your document, regardless of its title, may or may not be legally binding.

Your lawyer is your best resource when it comes to creating and enforcing your agreement and can guide you on the legalities. If you haven’t already got your business professionals involved, it’s definitely time to call them. They will be able to recommend which pre-contract document is best for you and will help draw it up.

What’s included in a Term Sheet?

While all slightly different in length and structure, your Term Sheet should include an overview of everything the buyer is purchasing, plus any terms or conditions that are part of the business sale. This includes:

• Assets – what physical assets, products, and intellectual property are included as part of the purchase, and the approximate value of those assets
• Induction periods – any training, induction, or compliance that needs to take place, from either the seller or the buyer
• Staff – who is employed by the business, and on what terms
• Goodwill – what existing relationships, customer connections, and other ‘intangibles’ the buyer can reasonably expect as part of the purchase
• Warranties/permits/legal accreditation – what legal and compliance certification come with the business
• Restraint of trade – details of any ‘stand down periods’ and how long the seller will not be involved in a competing business
• Indemnities and other legal safeguards – what’s included in the way of pre-existing insurance or legal documentation to help protect the new business owner
• Price – you may discuss or settle on a price at this stage, or wait until both you and the buyer are in agreement with what’s included in the sale

Depending on the complexities of your business sale, what’s included in your term sheet may be updated as you negotiate further. When you are all in agreement on the conditions included in the term sheet and can settle on a purchase price, it’s time to have a formal contract drawn up.

Remember…

While a Term Sheet is not the same as a formal sales contract, it can be an important stepping stone to closing the deal. The terms and conditions you agree to now will inform what is included in your final sales agreement and how you negotiate could make or finish the sale. At the end of the day, successful negotiations are based on compromise, so go into each discussion with an open mind and you’ll be well on your way.

Not sure what else to think about when selling? Check out our ultimate guide on how to sell a business.