Got an M&A deal on the table? Now, it’s time to know your initial documents inside out. Many dealmakers mistakenly swap the Term Sheets and LOIs, treating them like they’re the same. This misunderstanding can lead to confusion, missteps, and even setbacks. The truth is, these documents are different, and knowing how to leverage each one at the right time is crucial to driving your deal forward smoothly.
Let’s break down how these two documents and understand the difference between Term Sheets and LOIs for your deal’s success!
Breaking Down the Roles of Term Sheets and LOIs in M&A
1. What is the Purpose?
Term Sheet:
Acts as a roadmap, giving a detailed picture of the proposed deal. For instance, it specifies working capital adjustments, indemnification terms, and representations and warranties. Its goal is to provide a clear foundation for further negotiations and identify potential deal-breakers early.
LOI:
Signals intent to proceed. It’s the handshake that assures both parties as they are on the same page before diving into exhaustive due diligence and drafting the final agreement.
2. When to Draft These Documents?
Term Sheet:
Appears right after initial discussions, allowing both parties to test compatibility on key deal elements. It saves time by clarifying terms before costly processes like financial audits or legal reviews.
LOI:
Finalizes the intent to proceed, based on the term sheet. By this stage, the parties are serious about the deal and ready to formalize negotiations.
3. How Detailed Are Term Sheets and LOIs in M&A Deals?
Term Sheet:
Goes deep into specifics. For example, it defines whether an earn-out payment will be based on revenue or EBITDA. This document minimizes ambiguity, especially for complex deals involving multiple variables like stock options, employee retention, or escrow amounts.
LOI:
Covers high-level terms like the deal structure (e.g., asset purchase vs. stock purchase) or confidentiality. It doesn’t delve into details like working capital adjustments but establishes intent.
4. What are the Binding Provisions of Term Sheets and LOIs?
Term Sheet:
Mostly non-binding but include critical binding clauses like exclusivity, which prevents the seller from negotiating with other buyers for a set period. These clauses safeguard the buyer’s position while they conduct due diligence.
LOI:
Similar in binding nature to the term sheet. For example, its confidentiality clause ensures sensitive information shared during the M&A process isn’t leaked or misused.
5. What is the Strategic Role of these in the deals?
Term Sheet:
Ensures there’s a shared understanding of deal specifics, reducing friction during due diligence. For instance, it aligns both parties with adjustments to the purchase price.
LOI:
Acts as a trust-building mechanism. By formalizing the buyer’s intention to proceed, it fosters a collaborative atmosphere, ensuring smoother negotiations.
How The Term Sheets and LOIs Work Together?
When dealmakers recognize and respect the differences between Term sheets and LOIs, the deal process flows smoother, negotiations become more efficient, and costly missteps are avoided. Mistaking Term Sheets for LOIs—or vice versa—is a common slip, but one that can cost you time, clarity, and sometimes the deal itself. For founders, sellers, and buyers, mastering the Term Sheets is essential. The details within these documents need careful handling as they set the tone for final negotiations. Knowing when and how to use both Term Sheets and LOIs can save you from future headaches, streamline the process, and keep your deal on track.
M&A Made Simple: Mastering Term Sheets and LOIs with MS
At MS, we make M&A seamless. Whether it’s drafting a detailed term sheet or creating a rock-solid LOI, our expertise ensures clarity, minimizes risk, and sets your deal up for success. Our team provides expert guidance to clarify critical deal terms, including pricing, payment structures, and due diligence, helping you avoid common pitfalls and costly oversights. With a focus on minimizing risk and maximizing value, we ensure that both buyers and sellers are well-prepared to proceed confidently and close deals efficiently.