Short answer: An M&A term sheet, often called a letter of intent or LOI, sets out the main terms of a proposed acquisition before the purchase agreement is drafted. Sellers should review the headline price, cash at close, debt and working-capital adjustments, deal structure, exclusivity, diligence conditions, financing certainty, earnouts, rollover equity, escrow, indemnity, employee terms, and closing conditions before signing.
A term sheet can feel preliminary because much of it is usually non-binding. In practice, it often becomes the commercial script for the rest of the deal. Once a seller signs and grants exclusivity, the buyer has more room to complete diligence, negotiate the purchase agreement, and revisit terms without competing buyer pressure.
That is why sellers should treat the term sheet as a serious negotiation document, not an administrative step on the way to closing.
What an M&A term sheet is for
An M&A term sheet is a short document that records the proposed economics, structure, process, and risk allocation for an acquisition. It is usually exchanged after initial conversations, buyer screening, and enough diligence for the buyer to make a serious proposal.
The document has three jobs. It clarifies whether the buyer and seller are aligned on the deal. It gives lawyers and advisors a basis for drafting definitive agreements. It also creates the process rules for the next phase, especially confidentiality, exclusivity, diligence, timing, and expenses.
A good seller-side term sheet should answer a simple question: if we sign this and stop speaking with other buyers for a period of time, do we understand what we are giving up, what we are likely to receive, and what can still change?
M&A term sheet, LOI, and purchase agreement: what is the difference?
People often use term sheet and LOI interchangeably. The label matters less than the content. What matters is whether the document clearly separates proposed commercial terms from binding process commitments.
| Document | When it is used | What sellers should watch |
|---|---|---|
| Indication of interest | Early buyer interest before full diligence | Usually less detailed. Useful for comparing buyer appetite, not enough for exclusivity. |
| Term sheet or LOI | After the buyer has enough information to propose terms | Often non-binding on price and closing, but binding on exclusivity, confidentiality, and expenses. |
| Purchase agreement | After confirmatory diligence and legal drafting | The definitive contract. It contains the detailed representations, warranties, covenants, conditions, indemnities, and closing mechanics. |
Before you reach the term-sheet stage, make sure the buyer is credible. Alehar's guide to questions to ask a potential acquirer can help you qualify the buyer before you share more sensitive information.
M&A term sheet example: the key sections
A simple acquisition term sheet usually covers the sections below. The exact wording belongs with counsel, but sellers should understand the commercial meaning before signing.
| Term | Seller question | Why it matters |
|---|---|---|
| Buyer and seller | Which legal entities are signing, acquiring, and guaranteeing obligations? | The apparent buyer may not be the entity with capital, assets, or credit support. |
| Transaction structure | Is this a share purchase, asset purchase, merger, carve-out, or partial sale? | Structure changes tax, liabilities, consents, employees, contracts, and what transfers at closing. |
| Enterprise value and equity value | Is the price stated before or after cash, debt, working capital, and other adjustments? | A high headline price can become lower proceeds if adjustments are not clear. |
| Consideration | How much is cash at close versus seller note, earnout, rollover equity, or buyer stock? | Conditional or illiquid consideration is not the same as cash proceeds. |
| Working capital | What target, methodology, and excluded items will be used? | Vague working-capital language can create a purchase-price dispute late in the process. |
| Debt and debt-like items | Which liabilities reduce the price or must be paid at close? | Items such as unpaid taxes, transaction expenses, leases, bonuses, and deferred revenue can affect proceeds. |
| Diligence and conditions | What must the buyer confirm before signing or closing? | Broad conditions give the buyer more room to renegotiate or walk away. |
| Exclusivity | How long is the no-shop period, and what must the buyer do to keep it? | Exclusivity removes competitive tension, so it should be earned and time-limited. |
| Escrow and indemnity | How much money is held back, for how long, and for what claims? | These terms determine how much risk stays with the seller after closing. |
| Management and employees | What happens to founders, key employees, compensation, retention, and roles? | People terms can affect value, morale, earnout achievability, and post-closing control. |
1. Purchase price and valuation basis
Start by separating headline value from real seller proceeds. A buyer may state a purchase price, enterprise value, equity value, or valuation multiple. Those are not always the same thing.
Ask whether the number assumes a cash-free, debt-free transaction, a normal level of working capital, repayment of debt, payment of transaction expenses, retention bonuses, escrow, deferred consideration, or any seller financing. If the buyer is using EBITDA, revenue, ARR, or another metric, confirm the exact definition and period.
Seller question: If every adjustment in the term sheet is applied, what cash would actually be paid at close?
2. Cash at close, earnout, seller note, and rollover equity
The form of consideration matters as much as the headline price. Cash at close carries different risk from an earnout, seller note, rollover equity, buyer shares, or deferred payment.
An earnout may make sense when the parties disagree about future performance, but it needs clear metrics, timing, accounting rules, operating controls, and dispute mechanics. Rollover equity may preserve upside, but it also exposes the seller to the buyer's future strategy, leverage, governance, and exit timing.
If an offer has several forms of consideration, compare them separately. Do not treat $10 million of cash, $10 million of buyer stock, and $10 million of earnout potential as economically identical.
For a deeper seller view, see Alehar's article on earnouts in M&A.
3. Working capital and debt-like adjustments
Working capital is one of the easiest places for sellers to lose value after agreeing to a headline price. A buyer may expect the business to be delivered with a normal level of receivables, inventory, payables, and other operating balances. If the actual amount is below the target, the purchase price may be reduced.
The term sheet should either state the working-capital target or describe how it will be calculated. It should also say which items are included and excluded. Cash, debt, transaction expenses, taxes, deferred revenue, customer deposits, leases, bonuses, and unusual payables should not be left to vague language.
This is where financial diligence and term-sheet negotiation meet. Alehar's financial due diligence guide explains the areas buyers usually test before closing.
4. Deal structure
The term sheet should identify whether the transaction is expected to be a share purchase, asset purchase, merger, partial acquisition, majority recapitalization, or carve-out. Each structure can produce different tax, legal, employee, consent, and liability outcomes.
A seller should ask why the buyer prefers the proposed structure and what it changes in practice. For example, an asset purchase may require more contract assignments and consent work. A share purchase may transfer more liabilities. A partial sale may leave the seller with ongoing governance, information rights, veto rights, or future exit obligations.
The right answer depends on the facts, so this is a counsel and tax-advisor topic. The commercial point is simple: structure can change the deal even when the headline price stays the same.
5. Exclusivity and no-shop terms
Exclusivity is often the most important binding term in an otherwise non-binding LOI. It usually means the seller agrees not to solicit or negotiate with other buyers for a defined period.
Buyers ask for exclusivity because they are about to spend time and money on diligence, financing, and legal work. Sellers should grant it only when the buyer has earned it.
Before signing exclusivity, try to confirm:
- The buyer has explained its strategic rationale and approval path.
- The proposed price, structure, and consideration are clear enough to evaluate.
- The buyer has financing or a credible funding plan.
- The diligence request list is specific.
- The exclusivity period is short enough to preserve leverage if the buyer stalls.
- Extensions require clear progress, not just more time.
The sell-side M&A process guide explains how exclusivity fits into a broader sale process.
6. Diligence scope and closing conditions
Term sheets often say the deal is subject to satisfactory due diligence. That phrase can hide a lot of buyer discretion. Sellers should ask what the buyer needs to confirm and which findings could change price, structure, or willingness to close.
Common conditions include financing approval, board approval, legal diligence, financial diligence, customer calls, key employee retention, third-party consents, regulatory review, no material adverse change, and final purchase agreement negotiation.
For larger or competition-sensitive U.S. transactions, the FTC premerger notification program explains that certain proposed transactions must be reported to the FTC and DOJ before closing, and that parties may not close until the waiting period has passed or early termination is granted. The DOJ and FTC's 2023 Merger Guidelines also describe factors and frameworks used when reviewing mergers and acquisitions. These are legal issues, but sellers should at least know whether the buyer sees regulatory review as a closing risk.
If you are already in diligence, use Alehar's due diligence red flags checklist to identify issues that could become price or closing problems.
7. Representations, warranties, indemnity, and escrow
The purchase agreement will contain detailed representations and warranties about the business. The term sheet may set the high-level framework: survival periods, indemnity caps, baskets, escrows, holdbacks, special indemnities, and whether representation and warranty insurance is expected.
Sellers should understand how much of the purchase price could be held back, what claims can be made against it, how long it remains at risk, and whether certain issues sit outside the general cap.
Seller question: After closing, what amount of the proceeds is still exposed to buyer claims, for how long, and under what circumstances?
8. Management, employees, and transition
Some term sheets focus heavily on price and barely mention people. That can be dangerous, especially for founder-led, services, software, healthcare, or relationship-heavy businesses.
If the buyer expects founders or key managers to stay, the term sheet should address role, reporting line, compensation, incentives, non-compete or non-solicit expectations, transition period, and what happens if the buyer changes the operating plan after closing.
Employee and customer commitments can also affect whether an earnout is achievable. If the seller will be paid partly on future performance, post-closing control and operating covenants matter.
For broader trade-offs beyond price, see Alehar's guide to non-financial considerations in M&A.
9. Confidentiality, announcements, and expenses
The term sheet should say whether the document is confidential, who can know about the transaction, how announcements will be handled, and who pays expenses if the deal does not close.
This is not just housekeeping. A leaked sale process can unsettle employees, customers, suppliers, lenders, and competitors. Expense language also matters when a buyer asks the seller to reimburse diligence, legal, or financing costs under certain circumstances.
Make sure the process rules fit the reality of the business, especially if the seller has a small leadership team, concentrated customers, or sensitive employee relationships.
Seller checklist before signing an M&A term sheet
Before signing, sellers should be able to answer these questions without relying on optimism:
- Do we know who the buyer is, who approves the deal, and how it will be financed?
- Can we translate the headline price into expected cash proceeds at close?
- Are working capital, debt, transaction expenses, taxes, and other adjustments clearly defined?
- Do we understand the structure and its tax, legal, employee, consent, and liability implications?
- Is any earnout, seller note, rollover equity, or buyer stock defined well enough to value separately?
- Is exclusivity short, justified, and tied to a clear diligence and signing timetable?
- Are buyer conditions specific enough to prevent open-ended renegotiation?
- Do we understand escrow, indemnity, holdback, and post-closing claim exposure?
- Are founder, management, employee, and customer transition points addressed?
- Have counsel, tax advisors, and financial advisors reviewed the document before signature?
Related Alehar resources
If you are earlier in the process, start with Questions to Ask a Potential Acquirer Before Selling Your Company. If you are preparing the process, read Sell-Side M&A Process: 9 Steps to Sell a Company. If the buyer is moving into diligence, use M&A Due Diligence Preparation: 11-Step Seller Checklist.
For specific risk areas, review Financial Due Diligence, Due Diligence Red Flags, and Strategic vs Financial Buyers in M&A.
How Alehar helps
Alehar helps founders, shareholders, and management teams prepare for buyer conversations, compare offers, negotiate term sheets, manage diligence, and run sale processes with a clear view of value, risk, and execution. We help sellers understand what the buyer is really offering, where value can leak between LOI and close, and which terms need to be settled before exclusivity.
If you are reviewing an acquisition term sheet or preparing for a sale, see Alehar's selling your company advisory service or contact Alehar to discuss the process.
