What is a Term Sheet?
Alternative names for a term sheet include Letter of Intent (LOI), Memorandum of Understanding (MOU), Heads of Terms (or Heads of Agreement).
In essence, it sets out the fundamental terms and principles governing a potential investment into or acquisition of a company or some of its assets.
Should you involve lawyers to advise on a Term Sheet?
Whilst it may appear to be a preliminary, partially non-binding document, it generally will set out key terms and principles for the ensuing transaction and it will be difficult to veer away from these when negotiating the transaction documents, typically a Share Purchase Agreement or Asset Purchase Agreement. Therefore, it is advisable and usually cost-effective to involve lawyers to advise on and negotiate this document. Legal fees incurred in efforts to move away from the terms set out in the Term Sheet in subsequent negotiations will typically be far higher and, as above, may prove unproductive. Your lawyers will also make sure it is not in fact binding.
Who prepares the Term Sheet?
Typically, the lawyers for the lead investor or the acquiror will draft the document and then submit it to the target company for review.
Which terms to beware of in a Term Sheet?
There is an infinitely wide spectrum of disadvantageous terms that the drafting lawyers may include. These might include:
- the contingency of the payments, notably weighted towards earn-out rather than cash on completion;
- the voting or other rights of the investor on completion – these may include “blocking rights” which could prejudice or even scupper a subsequent sale;
- warranties and indemnities to be given by the company’s shareholders to the investors/acquiror;
For further information, contact simon.halberstam@smb.london