What is Term Sheet?
Definition
A term sheet is a non-binding outline of the proposed deal terms, typically 2-4 pages, exchanged before counsel drafts a full Letter of Intent (LOI) or Asset Purchase Agreement (APA). It is the bullet-point version of the deal: purchase price, structure (asset vs stock), key economic provisions, expected timeline. In ETA practice, term sheets often substitute for LOIs entirely on smaller deals: they capture the essentials without the legal weight. For a self-funded searcher in active outreach, the term sheet is the leverage tool. It signals seriousness without requiring legal fees, and it gives the seller something concrete to evaluate against competing offers. Most search-fund coaches recommend signing 3-5 term sheets for every 1 LOI that converts: the term sheet is intentionally easier to retract than an LOI. What goes in a typical ETA term sheet: • Purchase price (range or fixed). Often stated as a multiple of Adjusted EBITDA, e.g., '4.5x TTM Adjusted EBITDA, subject to confirmatory diligence.' • Structure (asset purchase vs stock purchase). Asset purchase is buyer-favorable for tax and liability reasons. Most ETA deals are asset deals. • Sources and uses (financing breakdown). SBA loan amount, seller note, equity from the searcher, rollover from the seller. • Working capital target. Either dollar amount or methodology. Critical for net price calculation at close. • Earnout terms (if applicable). Trigger metric, measurement period, cap. • Key conditions to close: financing contingency, legal entity formation, satisfactory diligence. • Exclusivity period (binding clause). Typically 60-90 days. • Confidentiality (binding clause). Typically 24 months. • Expected close date. For example, a self-funded searcher acquiring a $3.5M HVAC business might submit a term sheet with: '4.5x TTM Adjusted EBITDA of $850K = $3.825M purchase price, asset purchase, 75-day exclusivity, 90% cash at close (50% SBA, 25% seller note at 6% over 7 years, 25% buyer equity), 10% holdback in escrow for 18 months, working capital target of $250K, definitive agreement to close within 90 days post-LOI signing.' That single page communicates more about deal sophistication than a dozen email exchanges. The critical difference vs LOI: the term sheet is almost entirely non-binding. The exclusivity and confidentiality clauses sometimes get treated as binding, but they are often weaker than LOI exclusivity (no break-up fee, shorter duration). This means the term sheet is also weaker leverage for the buyer: the seller can keep shopping the deal until the LOI is signed. Strategic use: send a term sheet first, get to handshake on key economics, THEN sign an LOI that locks in the exclusivity. Skipping the term sheet phase and going straight to LOI works on smaller deals but burns more of the searcher's legal budget on dealsthat may not close. Watch for term sheets that bind too much (full LOI-equivalent exclusivity in a 'non-binding' wrapper), include hard-coded purchase price (when a range is more honest given diligence uncertainty), or omit financing structure (sellers will fill in their own assumptions and be disappointed at LOI). A clean term sheet has clear price methodology, financing transparency, and lightly-binding exclusivity that gives both sides room to walk. Inkvex flags term sheets by extracting binding-vs-non-binding clauses, identifying missing financing structure detail, calling out exclusivity language that creeps toward LOI strength, and benchmarking purchase-price multiples against deal-size norms. The risk score for typical ETA term sheets ranges from 2/10 (clean searcher template) to 7/10 (overly seller-favorable with hard pricing lock and asymmetric exclusivity). This is legal information, not legal advice. Always have your transaction attorney review before signing, even on a non-binding document.
Frequently asked questions
What is Term Sheet?
A term sheet is a non-binding outline of the proposed deal terms, typically 2-4 pages, exchanged before counsel drafts a full Letter of Intent (LOI) or Asset Purchase Agreement (APA). It is the bullet-point version of the deal: purchase price, structure (asset vs stock), key economic provisions, expected timeline. In ETA practice, term sheets often substitute for LOIs entirely on smaller deals: they capture the essentials without the legal weight. For a self-funded searcher in active outreach, the term sheet is the leverage tool. It signals seriousness without requiring legal fees, and it gives the seller something concrete to evaluate against competing offers. Most search-fund coaches recommend signing 3-5 term sheets for every 1 LOI that converts: the term sheet is intentionally easier to retract than an LOI. What goes in a typical ETA term sheet: • Purchase price (range or fixed). Often stated as a multiple of Adjusted EBITDA, e.g., '4.5x TTM Adjusted EBITDA, subject to confirmatory diligence.' • Structure (asset purchase vs stock purchase). Asset purchase is buyer-favorable for tax and liability reasons. Most ETA deals are asset deals. • Sources and uses (financing breakdown). SBA loan amount, seller note, equity from the searcher, rollover from the seller. • Working capital target. Either dollar amount or methodology. Critical for net price calculation at close. • Earnout terms (if applicable). Trigger metric, measurement period, cap. • Key conditions to close: financing contingency, legal entity formation, satisfactory diligence. • Exclusivity period (binding clause). Typically 60-90 days. • Confidentiality (binding clause). Typically 24 months. • Expected close date. For example, a self-funded searcher acquiring a $3.5M HVAC business might submit a term sheet with: '4.5x TTM Adjusted EBITDA of $850K = $3.825M purchase price, asset purchase, 75-day exclusivity, 90% cash at close (50% SBA, 25% seller note at 6% over 7 years, 25% buyer equity), 10% holdback in escrow for 18 months, working capital target of $250K, definitive agreement to close within 90 days post-LOI signing.' That single page communicates more about deal sophistication than a dozen email exchanges. The critical difference vs LOI: the term sheet is almost entirely non-binding. The exclusivity and confidentiality clauses sometimes get treated as binding, but they are often weaker than LOI exclusivity (no break-up fee, shorter duration). This means the term sheet is also weaker leverage for the buyer: the seller can keep shopping the deal until the LOI is signed. Strategic use: send a term sheet first, get to handshake on key economics, THEN sign an LOI that locks in the exclusivity. Skipping the term sheet phase and going straight to LOI works on smaller deals but burns more of the searcher's legal budget on dealsthat may not close. Watch for term sheets that bind too much (full LOI-equivalent exclusivity in a 'non-binding' wrapper), include hard-coded purchase price (when a range is more honest given diligence uncertainty), or omit financing structure (sellers will fill in their own assumptions and be disappointed at LOI). A clean term sheet has clear price methodology, financing transparency, and lightly-binding exclusivity that gives both sides room to walk. Inkvex flags term sheets by extracting binding-vs-non-binding clauses, identifying missing financing structure detail, calling out exclusivity language that creeps toward LOI strength, and benchmarking purchase-price multiples against deal-size norms. The risk score for typical ETA term sheets ranges from 2/10 (clean searcher template) to 7/10 (overly seller-favorable with hard pricing lock and asymmetric exclusivity). This is legal information, not legal advice. Always have your transaction attorney review before signing, even on a non-binding document.
Why does term sheet matter in a contract?
Risk level: Medium. Non-binding on price, but binding on exclusivity and confidentiality. Inkvex flags term sheet clauses during analysis, explains the risk in clear language, and suggests negotiation language to protect your interests.
How does Inkvex analyze term sheet clauses?
Inkvex scans your contract for term sheet-related clauses, flags risks in clear language, quotes the exact language from your document, and cites jurisdiction-specific laws that may affect enforceability. Upload any contract at inkvex.app for a free analysis.
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