What Is a Term Sheet?
A term sheet is a preliminary document that sets out the principal terms of a proposed transaction — including price, structure, key conditions, and timeline — in sufficient detail to confirm that the parties have reached agreement in principle before investing the time and cost of negotiating definitive agreements. In M&A, term sheets (also called heads of terms or memoranda of understanding) bridge the gap between initial discussions and binding legal documentation.
Term sheets are typically non-binding on the commercial terms, though certain provisions — confidentiality, exclusivity, and governing law — are usually binding.
Key Components
Commercial Terms
| Term | Description |
|---|---|
| Price / valuation | Enterprise value or equity value, and the basis of calculation |
| Consideration | Cash, stock, mixed consideration, or deferred payments |
| Structure | Asset purchase, share purchase, merger, or scheme of arrangement |
| Key assumptions | Cash-free debt-free, normalised working capital, or other pricing mechanisms |
| Earnout | Contingent consideration tied to post-closing performance |
Process Terms
| Term | Description |
|---|---|
| Exclusivity / no-shop | Period during which the seller cannot solicit competing offers (typically 30-90 days) |
| Due diligence | Scope, access, and timeline for buyer’s investigation |
| Timeline | Target dates for definitive agreement, regulatory approvals, and closing |
| Conditions precedent | Key conditions that must be satisfied before closing |
| Confidentiality | Obligations regarding non-disclosure of deal discussions |
| Break fee | Whether a termination fee applies |
Key Legal Terms
- Binding vs non-binding — commercial terms are usually non-binding; confidentiality, exclusivity, and costs provisions are binding
- Governing law — which jurisdiction’s law governs the term sheet and the anticipated definitive agreement
- Expenses — each party typically bears its own costs, with exceptions in some cases
Term Sheet vs Letter of Intent
The terms are often used interchangeably, but there are nuances:
| Feature | Term Sheet | Letter of Intent |
|---|---|---|
| Format | Bullet points / table format | Letter format |
| Detail level | Key terms only | May include more context and rationale |
| Typical use | PE transactions, venture capital | Strategic M&A, public company deals |
| Binding status | Same (mostly non-binding) | Same (mostly non-binding) |
Strategic Importance
Advantages of Term Sheets
- Alignment check — confirms both parties agree on material terms before incurring significant legal costs
- Negotiating leverage — establishes anchor terms that carry forward into definitive documentation
- Process efficiency — provides a roadmap for legal counsel drafting the definitive agreement
- Stakeholder communication — allows parties to brief boards, lenders, and advisors on agreed terms
Risks
- Moral obligation — though non-binding, departing from agreed term sheet terms creates friction and can damage trust
- Pre-contractual liability — in some jurisdictions, negotiating in bad faith after signing a term sheet may create liability
- Anchoring effect — terms set in the term sheet are difficult to renegotiate later, even if due diligence reveals issues
According to the American Bar Association’s M&A Committee, term sheets or letters of intent are used in approximately 80-90% of private M&A transactions, with the average time from term sheet to definitive agreement ranging from 30 to 90 days.
APAC Context
Australia — term sheets (often called “heads of agreement” or “heads of terms”) in Australian M&A are generally non-binding on commercial terms. Australian courts will enforce binding provisions (exclusivity, confidentiality) and may find an intention to create legal relations if the term sheet is sufficiently detailed and the parties’ conduct indicates binding intent.
Japan — term sheets (kihon gōi sho or memorandum of understanding) are widely used in Japanese M&A. Japanese practice places significant emphasis on the moral obligation created by a term sheet — departing from agreed terms is considered highly unprofessional and can damage the relationship irreparably.
India — term sheets in Indian M&A are governed by the Indian Contract Act. For transactions involving listed companies, SEBI’s disclosure requirements may require announcement of term sheet execution if it constitutes a material event. Stamp duty implications vary by state.
“The term sheet is where the deal takes shape — getting the key terms right at this stage prevents costly renegotiations later,” observes Daniel Bae, founder of Amafi. “In APAC cross-border deals, term sheets must anticipate the regulatory and structural complexities of the relevant jurisdictions.”
Negotiating M&A transactions across Asia Pacific? Amafi helps companies and investors structure deal terms and negotiate effectively. Learn more.