drafting-transaction-term-sheets

# Drafting Transaction Term Sheets

## When To Use

- Preparing a non-binding letter of intent (LOI) or indication of interest (IOI) for an acquisition, merger, or strategic investment
- Summarizing negotiated deal points into a structured term sheet for board review or counterparty circulation
- Converting verbal or email-based deal terms into a formal preliminary document before definitive agreement drafting
- Refreshing or redlining an existing term sheet after negotiation rounds

## Inputs To Gather

- **Transaction type**: stock purchase, asset purchase, merger, joint venture, minority investment, or recapitalization
- **Parties**: legal names, roles (buyer/seller/investor/target), and organizational jurisdiction
- **Valuation and price**: enterprise value, equity value, per-share price, or valuation methodology (DCF, comparable multiples, negotiated flat price)
- **Consideration structure**: cash at close, deferred cash, seller notes, earnout, equity rollover, stock consideration (fixed shares vs. fixed value), or combination
- **Earnout or contingent payment terms**: milestones (revenue, EBITDA, customer retention), measurement periods, dispute resolution mechanism
- **Key conditions precedent**: regulatory approvals (HSR, CFIUS, sector-specific), financing contingency, due diligence completion, third-party consents, shareholder approval [VERIFY jurisdiction-specific thresholds]
- **Exclusivity and timeline**: exclusivity/no-shop period duration, target signing date, expected closing timeline, outside date/drop-dead date
- **Indemnification parameters**: survival periods, cap (percentage of purchase price), basket/deductible (tipping vs. true deductible), escrow amount and release schedule
- **Reps and warranties scope**: standard vs. enhanced (e.g., R&W insurance contemplated), fundamental reps carve-outs, knowledge qualifiers
- **Governance/interim operations**: material adverse change (MAC) definition, pre-closing covenants, board composition post-close
- **Binding vs. non-binding provisions**: identify which sections are binding (exclusivity, confidentiality, governing law, expense allocation) vs. non-binding

## Workflow

1. **Confirm transaction structure** — Determine deal type and identify which term sheet template applies (asset deal, stock deal, merger, investment). Clarify whether this is an IOI (high-level) or LOI (detailed with binding provisions).

2. **Set the economic terms** — Draft purchase price, payment structure, and any contingent consideration. For earnouts, specify metrics, calculation methodology, measurement periods, and acceleration/forfeiture triggers. State whether price is subject to working capital adjustment and define the peg (target NWC amount or trailing average).

3. **Draft conditions precedent** — List all closing conditions organized by category: regulatory (HSR filing, antitrust clearance [VERIFY if deal meets HSR thresholds]), financing (committed financing requirement), diligence (satisfactory completion), third-party (landlord consents, key customer/supplier consents), and corporate (board and shareholder approvals).

4. **Outline reps, warranties, and indemnification** — Specify scope of seller/target reps (fundamental, operational, tax, IP, environmental). Define indemnification mechanics: survival periods (e.g., 18 months general, 36 months tax, indefinite for fraud/fundamental), cap, basket type and threshold, escrow terms, and whether R&W insurance is anticipated [VERIFY market norms for deal size].

5. **Address exclusivity and process terms** — Draft no-shop/exclusivity period with start and end triggers. Include break-up fee or expense reimbursement provisions if applicable. Specify governing law and dispute resolution for binding provisions.

6. **Include interim operating covenants** — Define restrictions on target operations between signing and closing (e.g., no material contracts, no dividends, no headcount changes above threshold, ordinary course requirement).

7. **Mark binding vs. non-binding sections** — Clearly label which provisions are legally binding. Typically binding: exclusivity, confidentiality, governing law, expenses, public announcements. Non-binding: economic terms, conditions, reps/warranties framework.

8. **Format and circulate** — Apply consistent section numbering, defined terms, and party references. Add signature blocks for authorized signatories with title and entity name.

## Output

The final term sheet should contain:

- **Header**: transaction title, date, parties, and binding/non-binding legend
- **Economic terms section**: price, consideration mix, adjustments, earnout
- **Conditions section**: organized list of all closing conditions
- **Reps and warranties framework**: scope summary and indemnification mechanics
- **Exclusivity and timeline**: key dates, no-shop terms, outside date
- **Interim covenants**: operating restrictions between signing and closing
- **Binding provisions section**: clearly separated enforceable terms
- **Signature block**: parties, titles, dates

Format as a clean document with numbered sections. Use defined terms consistently (e.g., "Buyer," "Seller," "Target," "Company"). Avoid footnotes; integrate qualifications inline.

## Quality Checks

- Purchase price and consideration components sum correctly; earnout mechanics are internally consistent
- All parties are named with correct legal entity designations
- Binding and non-binding provisions are explicitly labeled — no ambiguity on enforceability
- Indemnification cap, basket, escrow, and survival periods are stated numerically (not left as bracketed placeholders unless client hasn't decided)
- Conditions precedent cover regulatory, financing, diligence, and corporate approval categories
- Working capital adjustment mechanism is specified if applicable (target, collar, true-up timeline)
- Exclusivity period has a defined start date and expiration trigger
- MAC definition scope is stated or flagged for negotiation
- [VERIFY] HSR filing thresholds against current year thresholds (adjusted annually)
- [VERIFY] Jurisdiction-specific shareholder approval requirements for deal size
- [VERIFY] Any sector-specific regulatory approvals (FCC, state insurance, banking regulators) are included in conditions
- No inconsistencies between economic terms and indemnification limits (e.g., escrow exceeding cap)