Part V: The End Game

Chapter 42Term Sheet Received - Where to Go from Here

It is the moment that you have been waiting for, after weeks of negotiations and finally agreeing on the terms, an email from the acquirer with the term sheet in a word document. Let's take a look at a sample term sheet.

1. How to Read a Term Sheet

Below is a sample term sheet that includes all the key terms you would expect in a term sheet. While some term sheets are dozens of pages long, things can typically be boiled down to something like the following.

SUMMARY OF PROPOSED TERMS

Date: January 1st, 2030

Acquirer: Big Acquirer

Purchase Price:

Big Acquirer will acquire the assets (other than cash and cash equivalents) of Acquired Company for the following:

1. $1,000,000.00 in cash at the closing of the acquisition, payable to the target company

2. $2,000,000.00 of Big Acquirer's common stock based on the latest 409A price issued as stock certificate to the target company at the closing of the acquisition

3. $1,000,000.00 in cash as management retention plan payable to the founders and key employees with the following schedule:

1. $200,000.00 paid at closing

2. $200,000.00 paid at the first anniversary of closing

3. $200,000.00 paid at the second anniversary of closing

4. $200,000.00 paid at the third anniversary of closing

5. $200,000.00 paid at the fourth anniversary of closing

4. $2,000,000.00 of Big Acquirer option grants to the key employees at closing, exercisable based on Big Acquirer's latest 409A valuation as of the grant date.

Governing Law: Delaware, USA

Conditions to Close:

This Summary of Proposed Terms, except as specifically provided below, is non-binding. A closing of the acquisition would occur simultaneously with the signing of the transaction documents along with the following conditions:

• Satisfactory completion of remaining legal, accounting, business due diligence

• Review of technology and operations

• Big Acquirer's determination that no material adverse change to the business, financial or prospects of the target company occurred

• Employment contracts with key employees

Transaction Docs:

The parties will negotiate in good faith mutually acceptable transaction documents. The transaction documents will contain the terms summarized herein and such other representations, warranties, covenants and other terms that are customary for transactions of this kind. The equity holders receiving considerations from the target company will indemnify Big Acquirer on customary terms.

Target Closing:

On or before 60 days from the date this document is executed.

Binding Terms:

The following terms shall be binding upon the Acquired Company upon its execution of this Summary of Proposed Terms: Acquired Company shall work in good faith expeditiously towards a closing on or before the target closing date specified above. Acquired Company and its subsidiaries will not for a period of 60 days from the date this Summary of Proposed Terms is accepted (the "Exclusivity Period"), take any action to solicit, initiate, encourage or assist the submission of any proposal, negotiation or offer from, or engage in negotiations or discussions with, any person or entity, or engage in any similar actions, relating in any way to the sale or issuance of any capital stock of Acquired Company or the acquisition, sale, lease, license or other disposition of Acquired Company. No press release or other public statement may be issued by Acquired Company, its subsidiaries or any of their respective employees, directors or stockholders relating to this Summary of Proposed Terms or the transactions contemplated hereby without the prior written consent of Big Acquirer.

SIGNATURE BLOCKS

In the term sheet, it will include the key terms previously negotiated which include the type of the deal, considerations and retention. A couple other things to call out in this document is that there is a binding section of exclusivity as well as information embargo placed upon you, while terms for the acquiring company are completely non-binding.

Furthermore, the term sheet outlines expectations on the closing date, typically the same as the exclusive period. It also includes a set of closing conditions which are things that still need to be completed. It finally includes the transaction documents and provides expectations on what type of documents are needed to close the deal.

2. Things to Negotiate in a Term Sheet

Even though the key terms are agreed upon already, the term sheet now needs to be forwarded to your lawyers for review and redline any items that could be potentially problematic. For one, if your acquirer is not based in the US, the governing law for which the M&A adheres to would need to be aligned on. This may require you hiring lawyers in the geographic region where the acquiring company does business.

Even though the term sheet is non-binding for the acquirer, there are binding terms for you as the seller. Most notably, there is a no-shop clause baked into the agreement. Expect this clause to be there unless the offer is not serious, it protects the buyer from doing all the diligence work only to find out that you will bolt midway through the process or take a better offer elsewhere. While you cannot negotiate the exclusivity, you could negotiate the exclusivity period down to say 30 to 45 days instead of the stand 60 depending on how much leverage you have. Having a shorter exclusivity period could actually hasten the final closing period which keeps everyone focused on the deal and the risk of deal fatigue if the closing drags out.

Furthermore, there will likely be a set of closing conditions, where you should consult with your lawyer on the feasibility of meeting these conditions. Most of the time they are rather standard, but watch out for those terms that are beyond reasonable that are outside of your control. For instance, a buyer could impose a 100% retention of your customers before closing, which you should push back as such a request is unreasonable and having minor customer churn does not bring material difference to your business.

There is a sweet spot in terms of how much you should negotiate the term sheet with your potential acquirer. If the terms are clean and reasonable, then there are no issues with executing and moving on to the next phase of due diligence. However, if the terms are unreasonable and ambiguous, definitely push back as the negotiations done during the term sheet phase set the appropriate expectations for the final negotiations on the definitive agreement. If you come off as pushovers at this stage and accept key terms without contest, expect the definitive agreement negotiations to be lopsided where you or the company directors fronting all the risks and indemnifying for all liabilities. The goal is to arrive at somewhere that's reasonable for both sides, and also set appropriate negotiation expectations as you move forward to the next step of diligence and finalizing the transaction documents.

At this point, negotiations on the term sheet should be handed off to your lawyers given that you have an experienced M&A counsel. They will be much better and more efficient at spotting potential landmines in the legalese with respect to reps and warranties, indemnification caps, and other critical terms. They will also be able to play the bad cops in negotiations while you maintain a good relationship with the buyers as ultimately you still have to work for the buyers once the deal closes. Finally, in the unlikely event that you do get litigated down the road by an existing shareholder, the plaintiff will almost always attack the process and conflict management. Having outside counsel steer the redlines builds a discoverable record that the board acted with due care independence, demonstrated reliance on expert advice, and unlikely negotiated in bad faith.

3. You Are Still Miles Away from the FInish Line

Now you are finally ready to sign on the dotted line, but little do you know that this momentous day in months if not years in the endless M&A preparations, meetings, and negotiations is only the clearing of the opening hurdle. You and the potential buyer have simply moved from courtship to actual audit phase, with the buyer having the right to walk away at any time.

Now it is not unusual to close a deal in the targeted time frame if the deal is small, your board is aligned, and the transaction is not subject to regulatory or third-party approvals. Nevertheless, there is still a mountain load of work that needs to be done in order to close the deal. See table below for some of the big ticket items and why they can potentially drag on.

Remaining Task	What Actually Happens	Why It Can Drag On
Confirmatory Due Diligence	Deep-dive into financials, tax, legal, IP, HR, technology, cyber, ESG, commercial contracts. Third-party quality-of-earnings (QoE) reports and technical code reviews. Site visits and key-employee interviews.	Uncovers surprises (mis-booked revenue, IP gaps, pending litigation) that can reset price or kill the deal. Each new issue spawns follow-up digs and outside experts.
Definitive Agreement Negotiation	Drafting the stock/asset purchase or merger agreement, plus disclosure schedules. Arm-wrestling over reps & warranties, indemnities, caps & baskets, escrow size, earn-outs or holdbacks.	Every rep or indemnity dollar shifts risk. Lawyers redline for weeks; specialty insurance (RWI) may add another negotiation layer.
Regulatory & Third-Party Approvals	Antitrust/Hart-Scott-Rodino, CFIUS, foreign-investment, sector regulators (FDA, FCC, FINRA). Shareholder votes (full vote vs. majority vs. board consent), lender consents, key-customer "change-of-control" waivers. 280G Approval	Government timetables are outside everyone's control. One competitor complaint can kick reviews into months-long investigations.
Financing the Buyer	Buyer syndicates debt, lines up equity co-investors, or draws on credit facilities. Bridge-to-bond or private-equity capital calls.	Turbulent markets make lenders skittish; terms can shift or dry up, forcing renegotiation or price chips.
Tax & Structure Optimization	Decide between stock, asset, reverse triangular merger, F-reorg, etc. Model step-ups, NOL utilization, 280G "golden parachute" fix-ups.	Requires tax counsel opinions, sometimes foreign rulings—adds iterations.
Pre-Close Integration & HR Workstreams	Draft day-one org charts, retention packages, option rollovers, benefit plan transitions, work visa transfers. Data-room refreshes and employee-communications plans.	Culture fit and retention become deal-breakers; renegotiating key-employee packages takes time.
Closing Mechanics	Closing checklist, circulate officer certificates, wire instructions, FIRPTA forms.	One missing certificate can push out the closing date.

Work with your lawyers to list out all of the outstanding tasks and ask them for an estimate on the cost as well as schedule for each. As daunting as the next couple months look, experienced M&A lawyers have templates and playbooks for how to keep everything running on a tight schedule.