That document is likely a term sheet, and how a founder responds to it can shape everything that follows. Misreading it, or signing too fast, can quietly cost sellers leverage they can never get back.
This article breaks down what a term sheet actually is, what belongs in one, whether it's enforceable, and how to negotiate it before due diligence locks you in.
Key Takeaways
- A term sheet outlines proposed price, structure, and major deal terms before formal contracts are drafted.
- Most provisions are non-binding, except confidentiality, exclusivity, and non-solicitation clauses.
- Reviewing terms with an M&A advisor before due diligence begins can prevent costly missteps later.
What Is a Term Sheet in a Business Sale?
A term sheet is a preliminary document that outlines the price, deal structure, and material conditions of an acquisition. It's usually proposed by the buyer, though sellers and their advisors often shape the terms beforehand.
Mayer Brown's Deal Lawyers analysis describes it as an early-stage agreement on headline terms, before the parties invest more time in due diligence and definitive documents.
It typically runs one to several pages. A term sheet summarizes key terms; it does not exhaustively detail every deal point. That level of detail comes later in the purchase agreement.
Who Prepares a Term Sheet?
Buyers or their advisors usually draft the initial version. Sell-side advisors often negotiate revisions or shape the framework before a seller signs anything.
Term Sheet vs. IOI vs. LOI
These documents aren't interchangeable, even though people use the words loosely:
- IOI (Indication of Interest): A simple signal of interest carrying less information about the acquisition than an LOI, and most common at the lower end of the market
- Term sheet: A concise outline of valuation, structure, and key protections
- LOI (Letter of Intent): The buyer's proposed terms set out in full. Six items are standard: proposed valuation, transaction structure, expected rollover equity, financing assumptions, management retention expectations, and a timeline for closing
Whatever it is called, this is the point where you start qualifying the buyer rather than the offer. We'll compare the documents in more depth later in this article.
Where a Term Sheet Fits in the M&A Deal Timeline
A term sheet typically shows up after initial buyer interest and a preliminary financial review, but before formal due diligence and definitive agreements. It signals that a buyer is ready to move past casual conversations into a structured process, and it often sets the stage for exclusivity.
The general sequence looks like this:
- Confidentiality agreement and initial information exchange
- Buyer's IOI (indication of interest)
- Term sheet or negotiated headline terms
- LOI, often with exclusivity attached
- Detailed due diligence and definitive purchase agreement
- Closing
Lender term sheets are different: in SBA-backed or seller-financed deals, a separate lender term sheet may appear during the financing stage. That document comes from the buyer's lender, not from the acquisition term sheet between buyer and seller.
It outlines loan amount, amortization, rate, and prepayment terms, and it moves through the lender's own credit process. SBA guidance on 7(a) loans confirms these loans can fund a full or partial change of ownership, up to $5 million.
Key Components of a Business Sale Term Sheet
A well-drafted term sheet covers a handful of core elements. Here's what to expect.
Purchase Price and Valuation
The price section should state the dollar amount or range, the valuation metric used (often a multiple of adjusted EBITDA), and any conditions attached to it. A detailed price section exposes hidden conditions that a headline number alone can hide.
At Exit Boston, valuation conversations often reference EBITDA multiples directly. One transaction used $3.4 million in EBITDA against a 6.4x multiple to reach a $21.76 million enterprise value. Another used $9.0 million in EBITDA at an 8.2x multiple for $73.8 million.
These aren't universal benchmarks, but they show how the math typically works.
Deal Structure: Asset Sale vs. Stock Sale
- Asset sale: Buyer selects which assets (and sometimes liabilities) to acquire, often preferred by buyers for liability protection
- Stock sale: Buyer acquires the company itself, including unknown liabilities; sellers sometimes prefer this for tax reasons
Buyers and sellers frequently want different structures, and the term sheet should state which one is proposed.
Payment Terms
How you get paid matters as much as how much. Common structures include:
- Cash at closing: lowest risk for the seller
- Seller financing/notes: deferred payment carrying collection risk
- Earn-outs: payments tied to future performance, shifting some risk back to the seller
- Holdbacks/escrow: funds set aside to cover post-closing claims
A quick example: In one Exit Boston deal, a commercial label printing company with $2.0 million in EBITDA had an expected valuation of $8.0M to $10.0M but closed at $12.0 million. The structure was all cash with a rollover equity option.
Formats vary by deal size and industry, but this shows how price, payment mix, and structure come together in practice.
Other Standard Provisions
- Non-compete covenants, including duration and scope
- Employee retention terms for key staff
- Due diligence access rights and timeline
- Closing conditions the parties must satisfy
Exit Boston helps founders evaluate incoming term sheets against their financial goals and legacy objectives before signing. That review looks past the headline price to whether the structure matches what the owner wants from the sale.
Is a Term Sheet Legally Binding?
Most of a term sheet is not enforceable. It's a framework for negotiation, not a contract. But a few provisions typically do bind, whether or not the rest of the document does:
- Confidentiality clauses protecting deal talks and shared financials
- Exclusivity/no-shop provisions limiting outreach to other buyers for a set period
- Non-solicitation terms restricting contact with employees or customers during talks
Harvard Law's 2025 Corporate Governance Forum discussion notes that under Delaware law, a later definitive agreement doesn't automatically wipe out a binding term-sheet provision. That provision survives unless the definitive agreement directly contradicts it or the parties expressly end it.
Sign the exclusivity clause carefully. It may outlast the rest of the document even after a formal purchase agreement is signed.
Price and other commercial terms usually stay non-binding, which creates a separate risk. Watch for retrading. This is when a buyer signs a term sheet at one price, then pushes for a lower number or worse terms during diligence, often citing something they "discovered" in the financials. It's common enough that sellers should plan for it and negotiate protections up front.
Axial's 2025 Dead Deal Report puts a number on the risk. Non-QoE diligence findings caused 25.3% of broken LOIs in 2025, up from 19.1% in 2023, and QoE EBITDA discrepancies more than doubled over the same period, from 10.6% to 21.3%. Financing-related failures moved the other way, falling from 21.3% to 10.7%. Capital got easier and signed deals still died, which makes a retrade a preparation problem rather than a market one.
Term Sheet vs. Letter of Intent: What's the Difference?
The two terms get used interchangeably, but they are not the same document.
| Feature | Term Sheet | Letter of Intent |
|---|---|---|
| Length | Shorter, often bullet-style | Longer, more narrative |
| Commitment signal | Lower | Higher |
| Common context | Venture financing, early M&A talks | Business sale M&A |
| Binding clauses | Sometimes | Usually more explicit |
Term sheets show up more in venture capital financing, and the NVCA even includes a "Term Sheet and Agreement" among its model financing documents. In business sales, the LOI tends to dominate as the more formal step.
Regardless of label, evaluate the substance. A document called a "term sheet" with detailed binding clauses can carry more weight than an "LOI" that's vague and non-binding throughout.
What Both Documents Eventually Become
Neither one is the contract. As diligence progresses, attorneys for both sides negotiate the definitive purchase agreement, and that is the document that binds. Its key provisions cover purchase price, payment structure, representations and warranties, indemnification, and closing conditions. Every headline number in a term sheet stays a proposal until it survives that drafting and the closing conditions behind it: financing finalized, regulatory approvals obtained, documents prepared, funds transferred.
Negotiating a Term Sheet with Confidence
Before you sign anything, get your priorities straight.
Benchmark against market standards. Multiples vary widely by data source and deal size. GF Data reported 7.5x trailing-12-month adjusted EBITDA in Q3 2025 for private transactions in the $10M to $250M range, up from 6.9x the prior quarter. Use figures like this as context, not gospel, since populations and EBITDA definitions differ across reports.
Identify 2-3 non-negotiables before discussions start:
- Valuation floor
- Payment structure (how much cash at close vs. deferred)
- Non-compete length
Create competitive tension. A single buyer has no incentive to improve terms and every incentive to move slowly and negotiate hard. When several qualified buyers are working the same opportunity, each one knows that delaying may cost them the deal, and terms improve without being asked. An experienced advisor builds and manages that process.
Exit Boston works with founder-led businesses in distribution, manufacturing, and food & beverage to evaluate and negotiate term sheets that protect both valuation and legacy goals.
The firm defines the ideal buyer in advance through buyer intelligence, industry research, and precedent-transaction analysis, then positions the opportunity for what that buyer wants. Representation is measurable: companies working with a professional M&A advisor are 60% more likely to complete a sale, and advisor-represented transactions produce prices 6% to 25% higher than unrepresented sales of comparable businesses.
Don't rush the signature. Term sheets feel informal. They're not. Get legal and financial review before signing, even on documents that look like a simple outline.
Frequently Asked Questions
Who prepares a term sheet?
Buyers or their advisors typically draft the initial term sheet. Sellers and their M&A advisors often negotiate revisions before anyone signs.
Is a term sheet enforceable?
Most terms are non-binding. Confidentiality, exclusivity, and non-solicitation clauses are usually enforceable regardless of the rest of the document.
What is a term sheet in business?
It's a preliminary outline of price, structure, and key terms proposed before a formal purchase agreement is drafted. It maps the deal; it is not the binding purchase agreement.
Can you provide an example of a term sheet?
See the label printing company example above: $2.0 million EBITDA, an $8.0M to $10.0M expected range, closing at $12.0 million, all cash with rollover equity. Formats vary by deal size and industry.
What's the difference between a term sheet and a letter of intent?
The terms are often used interchangeably. LOIs generally signal stronger buyer commitment and appear more often in M&A business sales.
How long does it take to move from a term sheet to a closed deal?
Timelines vary widely depending on diligence complexity and financing. Pepperdine's 2026 Private Capital Markets Report found a 3-month median from LOI/offer to close for deals above $5 million. Treat that figure as a planning anchor, not a guarantee.
