What is an Acquisition Term Sheet?

Acquisition Term Sheet

An acquisition term sheet is a non-binding document that outlines the key terms and conditions of a proposed acquisition or merger between two parties. It serves as a preliminary agreement, summarizing the main points of the deal before the parties negotiate and sign a definitive, legally binding agreement, such as a purchase or merger agreement.

The term sheet is typically used to guide the negotiation process and provide a framework for more detailed due diligence and definitive agreements. It often includes key deal terms, such as:

• Deal structure: The type of transaction (e.g., asset purchase, stock purchase, or merger) and the form of consideration (e.g., cash, stock, or a combination of both).
• Purchase price: The proposed price for the acquisition, which may be subject to adjustments based on due diligence findings, working capital adjustments, or other factors.
• Payment terms: The timing and structure of payments, such as whether the purchase price will be paid upfront, in installments, or tied to the achievement of certain milestones.
• Representations and warranties: A summary of the key representations and warranties that each party will make in the definitive agreement.
• Conditions precedent: The conditions that must be satisfied or waived before the transaction can close, such as regulatory approvals, financing arrangements, or other material conditions.
• Covenants: Any ongoing obligations or restrictions that the parties agree to during the negotiation and closing process, such as non-compete agreements, non-solicitation agreements, or other operational covenants.
• Indemnification: The provisions outlining the indemnification obligations of each party in the event of breaches of representations, warranties, or covenants.
• Closing conditions: The conditions that must be met for the deal to close, such as obtaining necessary approvals, completion of due diligence, or the absence of material adverse changes.
• Exclusivity: An agreement by the parties to negotiate exclusively with each other for a specified period, preventing either party from pursuing other potential deals during that time.
• Confidentiality: An agreement to keep the terms of the deal and any related negotiations confidential.

It is important to note that the term sheet is generally non-binding, except for certain provisions, such as confidentiality and exclusivity, which are typically binding. Once both parties agree on the terms outlined in the term sheet, they proceed to negotiate and draft the definitive agreements to consummate the transaction.

Example of an Acquisition Term Sheet

Here’s an example of a simplified acquisition term sheet for a fictional company acquisition:

Acquisition Term Sheet

1. Parties Acquirer: XYZ Corporation Target: ABC Company
2. Transaction Structure Type: Stock purchase
3. Purchase Price Total Consideration: $50,000,000 Form: 70% cash and 30% XYZ Corporation common stock
4. Payment Terms
   • 80% of the cash consideration to be paid at closing
   • 20% of the cash consideration to be held in escrow for 12 months as a holdback for potential indemnification claims
   • XYZ Corporation common stock to be issued at closing
5. Representations and Warranties Both parties will provide customary representations and warranties in the definitive agreement, including those related to organization, capitalization, financial statements, taxes, and material contracts.
6. Conditions Precedent
   • Completion of satisfactory due diligence by XYZ Corporation
   • Approval by the boards of directors of both parties
   • Clearance from relevant regulatory authorities
7. Covenants
   • ABC Company agrees to a 2-year non-compete clause for its key management personnel
   • ABC Company agrees to a 2-year non-solicitation clause for its key management personnel
8. Indemnification
   • Both parties agree to indemnify each other for breaches of representations, warranties, or covenants
   • Indemnification claims will be capped at 15% of the total purchase price
9. Closing Conditions
   • Obtaining necessary approvals
   • No material adverse change in the business, financial condition, or operations of ABC Company
   • Execution of definitive agreements
10. Exclusivity
    • ABC Company agrees to negotiate exclusively with XYZ Corporation for a period of 90 days from the execution of this term sheet.
11. Confidentiality
    • Both parties agree to maintain the confidentiality of the terms of this term sheet and any related negotiations.

This term sheet is non-binding, except for the exclusivity and confidentiality provisions, which are binding. This term sheet is not intended to create a legally enforceable obligation, and the parties will only be bound upon execution of a definitive agreement.

Please note that this is a simplified example for illustrative purposes only, and actual term sheets will vary depending on the specific details and complexity of the transaction.