Sample term sheets are essential in any financial company. Term sheets state the terms of a loan or investment. It indicates the names of both the issuer and the investors. Besides, the term sheet shows the closing date, conversion rates, prices, and information rights. When transacting any business deal, therefore, you should always involve the term sheet.
Term sheets provide all the information associated with the business deal. It is important to note that term sheets are not the same as legal advice. Unlike legal advice, terms sheets mainly provide information on the terms of the loan. The term sheet is not a legal binding document and cannot be used in court.
How to Write a Term Sheet
Terms sheets are crucial documents when transacting a business deal. When writing one, there is a specific format you should follow. Apart from starting with an appropriate heading and opening paragraph, here are other things to include:
1. Explain your Business Type
In the term sheet, you should explain the type of business you deal with. Here is a sample:
Autozone Technologies is a software company dealing with the creation of phone applications. The firm also involves selling Product A, Product B, and Product C.
2. Write down the role of the target
You need to clarify the terms of the buyer. For example, you can write:
- The target will give a license to the buyer. The permit should be transferable and assignable without any royalty payment to create, import, lease, license, and distribute the products.
- The target should give transitional services to the buyer at no extra cost.
- The target shouldn’t undergo any additional changes before the closing date.
3. What to consider
A term sheet should include essential considerations. Below is an example of what to write under this section:
- Buyer to be the owner and sole beneficiary of all stocks.
- Target to transfer ownership of every stock free of charge to the buyer.
- Target should transfer all support contracts with clients to the buyer.
- Relinquish all vendor licenses in favor of the buyer.
- Work with the buyer to ensure a smooth transfer of vendor contracts.
4. Purchase Price
The purchase price forms an integral part of the term sheet. For example, you can write: The total purchase price of the product is USD 1000000. In case of any deficit, the same amount shall be adjusted from the purchase price.
5. Payment Terms
This forms an essential part of the term sheet. It indicates how the loan or business transaction will be paid. Here is an example of payment terms:
- A down payment of 70% of the purchase price should be made as agreed.
- 15% will be paid one year after the closing date. This amount is subject to taxes and revenue projection.
- The remaining 15% to be paid within two years of the closing date.
- Earn-outs will be paid without interest.
6. Due diligence
This section discusses the due diligence terms allowed to the buyer. Here is a sample of due diligence terms.
- The buyer will be allowed to conduct due diligence on the proprietary platform, target’s business, projected and historical financials, legal contracts with vendors, legal agreements with customers, marketing strategy, and tax compliance.
- The due diligence results should be satisfactory to the buyer’s board and senior management.
7. Closing conditions on the sheet
Here is an example of closing conditions:
- The seller adheres to the provisions and all applicable laws.
- All the warranties and representations to remain valid until the closing date.
- All the equity stocks are free of charge.
- The buyer is satisfied with the due diligence results.
Other Things to Consider
In your term sheet, you can also add the following information:
- Governing law: This indicates the legal jurisdiction that will handle the term sheet. For example, you can say: “This term sheet will be governed by the laws of the state of Texas. All the proceedings will be conducted in English.”
- Fees and Expenses: All the expenses, including due diligence, professional, legal, negotiation, advisory support, etc., shall be paid for by both parties.
- Non-compete: The target and its administration agree not to poach acquired employees for three years from the closing date. They also agree not to be part of any organization that deals in the same business.
- Closing date: This indicates the day the transaction is supposed to end. For example, “The closing date is set within 30 days of the due diligence process.”
- Confidentiality: Every party involved in the transaction agrees that the term sheet is meant for a deal between the buyer and the seller. The target is transferring its stock under consideration that the buyer will pay the required amount.
- Termination: The term sheet should also have a provision for contract termination. For example, “Either party may terminate this contract by a simple notice like email before the signing of the binding agreement. No party is required to give reasons for termination.”
Download Term Sheet Templates
Are you having challenges creating a term sheet? You can download free and premium templates to have better assistance.