A term sheet can give a transaction direction. It can also create expectations that become difficult to change once the parties invest time, incur costs or stop exploring alternatives. Before signing, consider the commercial assumptions behind the proposed terms and ask your lawyer to explain their legal effect. The title of the document alone does not tell you whether particular provisions are binding.
1. What exactly is the transaction?
Make sure the parties have the same understanding of what is being bought, sold or funded. Are all shares included, selected assets, or an interest that will change over time? Are any assets, liabilities or activities excluded? A short description that sounds clear in conversation can conceal different expectations about the business or investment actually covered.
2. How will value become payment?
Identify the proposed price, timing and adjustment mechanisms. Is some consideration deferred? Does payment depend on financial performance, customer retention or another event? Ask your accountant to model plausible outcomes, including an outcome below expectations. A price range can be more informative than a headline amount when the ultimate payment depends on several moving parts.
For a hypothetical seller, a higher offer with uncertain future payments might be less attractive than a lower amount paid at completion. The preferred outcome will depend on the seller's priorities and appetite for continued exposure. Make that choice consciously rather than allowing the larger headline figure to determine the discussion by default.
3. What must happen before completion?
List the significant conditions and approvals. These may involve financing, diligence, internal approvals or third parties. Identify who is responsible for progressing each item and how long it is expected to take. Ask your advisers to distinguish genuine prerequisites from matters that can be addressed through a different commercial arrangement or after completion.
4. What commitments are being made now?
Discuss exclusivity, confidentiality, costs, access to information and any deposit arrangements with your lawyer. If the proposed timetable gives one party an extended period to investigate, consider what progress should occur during it. Clear milestones help both parties judge whether discussions are advancing and whether continued commitment of time and resources remains sensible.
5. What happens if assumptions change?
Consider how the parties will respond to material diligence findings, a financing shortfall or a missed milestone. You do not need to predict every difficulty. You do need to understand where uncertainty sits and avoid presenting unsettled assumptions as agreement. Ask your advisers which issues should be addressed now and which belong in later documentation.
Use the term sheet to organise the deal
A useful term sheet creates a shared commercial starting point. Before signing, prepare a list of agreed positions, unresolved matters and assumptions requiring confirmation. Circulate that list to the relevant advisers so the next stage of work begins on a consistent basis and everyone understands what instructions have actually been given.
If you need help negotiating those commercial positions and coordinating the discussion with your advisers, call Ardian Law on 02 8111 7700 before committing to a timetable or set of terms you have not fully considered.