Mergers and acquisitions (M&A) are pivotal moments in a business’s lifecycle. Whether you're buying, selling, or merging a company, these transactions can significantly shape your business's future. However, one critical aspect of the process is often underestimated: the term sheet or letter of intent (LOI).
While term sheets are typically non-binding, they lay the groundwork for the entire transaction, setting out the key terms of the sale and purchase. It’s at this stage that taking legal advice is not just helpful—it’s essential.
Understanding the Role of the Term Sheet
The term sheet is a document that outlines the main terms and conditions of a deal, including:
- Purchase price and payment structure
- Key timelines and milestones
- Conditions to closing
- Key representations, warranties, and indemnities
Although it’s labelled as “non-binding,” the term sheet carries significant weight in shaping the negotiations that follow. Once terms are agreed upon and put in writing, they create a clear framework that both parties are expected to honour, making it difficult to backtrack without damaging the deal or risking trust between parties.
The Risks of Rushing Through the Term Sheet
Founders, investors, and corporates often make the mistake of viewing the term sheet as a simple starting point. Without legal guidance, this stage can lead to:
- Unintended Commitments: Key terms, though non-binding, can set strong expectations. Negotiating changes later can strain relationships or derail the deal.
- Missed Opportunities: Poorly drafted terms may fail to address important aspects like earn-outs, deferred payments, or contingent liabilities.
- Complex Legal Issues Down the Line: Ambiguities or overly simplistic terms can create friction during the due diligence and drafting stages, increasing costs and delays.
Why Legal Advice at the Term Sheet Stage Matters
Seeking legal advice at the outset ensures that the term sheet is both comprehensive and strategically sound. Here’s how it helps:
- Clarity on Key Terms: Lawyers can identify and resolve potential conflicts or ambiguities before they escalate.
- Protecting Your Interests: Legal advice ensures terms such as warranties, indemnities, and conditions precedent are fair and aligned with your goals.
- Avoiding Binding Pitfalls: Certain clauses, like exclusivity or confidentiality, may be binding. Lawyers can ensure these provisions are appropriately drafted.
- Saving Time and Money: A well-drafted term sheet sets a clear path, reducing negotiation time and legal costs during the later stages of the deal.
The Difficulty of Backtracking
While technically non-binding, the term sheet represents a mutual understanding between parties. Attempting to renegotiate key terms later can:
- Undermine trust and goodwill, jeopardising the deal.
- Result in sunk costs for both parties, as significant time and resources are invested based on the initial terms.
- Cause reputational damage, particularly in tight-knit industries where credibility matters.
A Proactive Approach to M&A Success
At Avery Law, we’ve seen the difference proactive legal advice can make at the term sheet stage. By engaging experienced legal counsel early, founders, investors, and corporates can ensure their interests are protected and set the foundation for a smooth transaction.
Whether you’re navigating your first M&A deal or managing a complex transaction, the importance of early legal advice cannot be overstated. The term sheet is more than just a formality—it’s the blueprint for your deal’s success.
Get in Touch
If you’re planning an M&A transaction, contact us at Avery Law. Let us guide you through the term sheet stage and beyond, ensuring every detail is aligned with your goals. With the right advice from the start, you can negotiate with confidence and clarity, knowing your interests are protected at every stage of the deal.