Term Sheets and Letters of Intent

What is the difference between a Term Sheet and a Letter of Intent? Well, not much. A term sheet is typically used for negotiations with a venture capitalist and an entrepreneur. It is essentially used as a basis of negotiations and once the deal comes to closing the terms of the deal will be very similar to the terms listed on the terms sheet. A letter of intent is typically used as a document for negotiations in a merger or acquisition.

Once the negotiations are complete then due diligence will begin. Unless if the buyer reveals that the company is less profitable than it was initially lead to believe, or if the it finds something that could be detrimental as a going concern of the company, the terms will remain in place. If something is found then the companies may reenter the negotiation prior to closing the deal.

Or, if that something is a major issue, the buyer may walk away from the deal completely.

Is the Term Sheet or Letter of Intent Legally Binding?

No, the term sheet is not legally binding. Remember the last time you bought a car? If you bought it from a dealer you probably started negotiating with someone who got the price to a reasonable point, then he or she had you sign your initials on a piece of paper next to the price you were willing to pay and went to discuss it with someone else.

This is kind of like that. While neither document is legally binding it is a point of negotiation, and if both parties involved are ethical and stick to their word the deal will be completed close to those agreements again, unless due diligence reveals misleading information.

Key Elements Typically Found in a Term Sheet or LOI

While neither document is legally binding in its entirety, the contents carry significant weight in shaping the final acquisition agreement. Practitioners generally expect both instruments to address the following core elements:

• Purchase price and structure — total consideration, whether paid in cash, stock, seller notes, or a combination thereof
• Earn-out provisions — contingent payments tied to post-close performance milestones, which can bridge valuation gaps between buyer and seller
• Exclusivity period — a window (often 30–90 days) during which the seller agrees not to solicit competing offers, giving the buyer time to complete due diligence without fear of an auction breaking out again
• Conditions to closing — regulatory approvals, financing contingencies, material adverse change clauses
• Confidentiality obligations — even within a non-binding LOI, confidentiality provisions are frequently carved out as legally enforceable
• Break-up fees — in larger transactions, a reverse termination fee may be negotiated to compensate the seller if the buyer walks without cause

Understanding these components up front prevents costly misalignments late in the process. A well-constructed LOI sets the negotiating table so that final sell-side transaction documents reflect the parties’ actual intentions.

Should You Negotiate the Sale of Your Own Business?

Just like what is done with the car dealer who negotiates with you then takes the agreement back to the person in the office, it is very helpful to have an intermediary who can do the negotiations with the buyer on your behalf. This helps to keep emotions from getting in the way and keep the deal and negotiation moving forward. Having a skilled advisor in your corner during the term-sheet phase can mean the difference between a smooth close and a protracted renegotiation.

As you approach the LOI stage, consider also how long-term customer contracts factor into your valuation — buyers will scrutinize revenue predictability carefully before finalizing their offer price.

From LOI to Closing: What Comes Next

Once both parties execute the letter of intent, the process shifts into structured due diligence and then definitive agreement drafting. This phase typically follows a predictable sequence:

1. Buyer opens a virtual data room and begins reviewing financial statements, contracts, employee matters, and intellectual property
2. Advisors on both sides negotiate representations and warranties, indemnification baskets and caps, and escrow terms
3. The definitive purchase agreement — and any ancillary documents like employment agreements or non-competes — are finalized
4. Regulatory filings are submitted, financing is confirmed, and a closing date is set
5. Funds are wired and ownership formally transfers

A poorly drafted LOI can complicate every step above. Ambiguous pricing language, undefined adjustment mechanisms, or vague exclusivity terms create disputes that erode trust and slow momentum at precisely the wrong time. Investing in clear, precise term-sheet language upfront is one of the highest-return activities in any transaction.

To get a head start on organizing your transaction materials, prepare your transaction package before entering LOI negotiations — having your financials, legal structure, and key agreements organized in advance signals seriousness to buyers and accelerates their diligence process.

Frequently Asked Questions

Can a buyer back out after signing a letter of intent?

Yes, in most cases. Because the LOI is non-binding on core economic terms, a buyer can legally walk away — though doing so without cause, particularly during an exclusivity period, can damage professional relationships and, in some jurisdictions, give rise to claims of bad-faith negotiation. The carve-outs (confidentiality, exclusivity, break-up fees) are exceptions that are typically enforceable.

How long does the period between LOI and closing typically last?

For middle-market transactions it commonly ranges from 60 to 120 days, though this varies by deal complexity, regulatory requirements, and financing needs. Buyers conducting thorough due diligence and lenders underwriting acquisition financing can extend timelines. Early organization of data-room materials by the seller is one of the most effective ways to compress this window.

What is an earn-out and when is it used?

An earn-out is a contingent component of the purchase price that is paid only if the acquired business hits agreed-upon performance targets after closing. It is most commonly used when the buyer and seller disagree on value — typically because the seller projects strong future growth that the buyer is unwilling to pay for upfront. Earn-outs bridge that gap but introduce complexity around measurement, accounting methods, and seller autonomy post-close.

Should the LOI specify asset purchase vs. stock purchase?

Yes, absolutely. Deal structure has material tax and legal consequences for both parties. Buyers often prefer asset purchases (to obtain a stepped-up tax basis and limit inherited liabilities), while sellers frequently prefer stock sales (for capital gains treatment). Negotiating this point at the LOI stage avoids a costly structural dispute late in the process.