What to Check Before Signing an M&A Term Sheet

Mergers and acquisitions (M&A) can be exciting, but before getting caught up in the momentum, it’s important to pause and review the term sheet carefully. A term sheet outlines the key terms and conditions of a potential deal, often serving as the roadmap for the final agreement. This article walks you through what to check before signing a term sheet in an M&A deal, ensuring you protect your interests from the start.

Why Reviewing a Term Sheet Matters

Even though many M&A term sheets are labeled as “non-binding,” they often include clauses that are legally enforceable. Signing without fully understanding the details can lock you into obligations or weaken your negotiation power later.

Key Points to Review in a Term Sheet in an M&A Deal

Let’s break down the most critical elements you need to examine before putting pen to paper.

1. Binding vs. Non-Binding Terms

Most term sheets include a mix of binding and non-binding provisions. Typically:

• Binding clauses may include confidentiality, exclusivity, break fees, and governing law.
• Non-binding clauses generally cover price, deal structure, and other commercial terms.

Make sure the language clearly identifies which clauses are binding and which are not. This prevents misunderstandings if the deal doesn’t move forward.

2. Exclusivity Clauses

An exclusivity clause prevents the seller from negotiating with other potential buyers for a set period. Before agreeing:

• Review the length of the exclusivity period
• Check for automatic renewals
• Confirm if there are conditions for early termination

If not carefully drafted, exclusivity clauses can block other opportunities or become a negotiation disadvantage.

3. Confidentiality Provisions

Most term sheets in an M&A deal include a confidentiality clause to protect sensitive business information. Confirm that:

• Confidentiality applies to both parties
• The definition of “confidential information” is clear
• There is a reasonable duration for the obligation

You may also want to include exceptions for publicly known information or disclosures required by law.

4. Break Fees

Break fees (also known as termination fees) may apply if either party walks away from the deal. Key questions to ask:

• Is the break fee fair and proportionate?
• What triggers the payment?
• Is there a cap on liability?

These terms can significantly affect your leverage and financial exposure.

5. Valuation and Payment Structure

The term sheet should explain how the company is valued and how payment will be made. Look out for:

• Valuation methodology (e.g., EBITDA multiples)
• Cash vs. equity considerations
• Earn-outs or deferred payments
• Price adjustment mechanisms based on working capital or net debt

Clarity at this stage avoids major surprises later.

6. Representations and Warranties

While the final agreement will have detailed representations and warranties, the term sheet in an M&A deal may hint at what’s expected. Consider:

• Which party is responsible for what disclosures
• Whether indemnification is discussed
• Any limitations on liability or survival periods

This section gives you early insight into risk allocation.

7. Due Diligence and Timeline

Ensure the term sheet outlines the scope and timeline for due diligence. It should address:

• Type of due diligence (legal, financial, operational, etc.)
• Access to information and team availability
• How long the due diligence period will last

This helps set expectations and reduces potential delays.

Conclusion

Before signing any term sheet in an M&A deal, take the time to review all critical clauses with legal counsel. Even in a non-binding document, key terms like exclusivity, break fees, and confidentiality can impact your strategic position. A well-reviewed term sheet lays the groundwork for a smoother transaction and protects you from future conflicts