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

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).
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).
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).
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].
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.
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).
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.
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)