Finance term
Term Sheet
Also known as: deal term sheet, investment term sheet, LOI term sheet
Definition
A term sheet is a non-binding document outlining the key economic and governance terms of a proposed deal — an acquisition, investment, or loan — before the parties invest in full legal documentation. The SEC requires disclosure of material non-binding term sheets in 8-K filings for public companies. See sec.gov/cgi-bin/browse-edgar and the SBA's loan term guidance at sba.gov.
Detailed explanation
A term sheet is the foundational deal document that defines the 'deal architecture' — the key economic, structural, and governance terms — before attorneys draft definitive agreements. It is typically 5-15 pages and non-binding, though it often includes binding provisions on exclusivity and confidentiality.
**Core components of an acquisition term sheet:** - Purchase price and structure (cash, stock, seller note, earnout) - Working capital target and adjustment mechanism - Representations and warranties scope (and any R&W insurance) - Indemnification caps, baskets (deductibles), and survival periods - Closing conditions (regulatory approvals, financing contingencies) - Exclusivity period (typically 30-60 days) - Break-up fees (if applicable)
**Core components of a financing term sheet:** - Loan amount and type (term, revolver, delayed draw) - Interest rate and spread (over SOFR or fixed base) - Amortization schedule and maturity - Collateral and security package (blanket lien, real estate mortgage) - Financial covenants (leverage ratio, fixed charge coverage) - Fees (origination, unused revolver, prepayment penalties)
**Non-binding nature:** The non-binding nature means neither party is legally obligated to close on the stated terms — either party can walk away before definitive agreements are signed. However, the exclusivity and confidentiality provisions embedded in most term sheets are binding and create real obligations. Violating exclusivity can trigger liability for deal costs even without a signed agreement.
**SBA context:** For SBA 7(a) and 504 loans, lenders issue commitment letters (functionally term sheets) outlining approved loan terms before formal closing. The SBA's Standard Operating Procedures (SOP 50 10) govern what must be disclosed in commitment letters for SBA loans. See sba.gov/document/support--sba-sop-50-10.
◈ Worked example
- M&A term sheet: Buyer offers $8M for a manufacturing business. Term sheet specifies: $7M cash at closing + $1M earnout over 2 years tied to EBITDA targets, $500K seller note at 6% over 3 years, 45-day exclusivity, working capital target of $800K with $100K basket, 18-month survival on general reps.
- Financing term sheet: A commercial bank issues a term sheet for a $3M SBA 7(a) loan: 25-year term (real estate component), 7(a) maximum rate (prime + 2.75%), blanket lien on all business assets, personal guarantee of all owners >20%, $75K origination fee, 45-day conditional approval.
- VC investment term sheet: Series A investor proposes $5M pre-money valuation with $2M investment. Term sheet specifies: 1x non-participating liquidation preference, broad-based weighted-average anti-dilution, pro-rata rights for future rounds, 2 board seats (1 investor, 1 independent), standard NVCA voting protections.
Common questions
The most-asked questions about Term Sheet — answered straightforwardly.
Is a term sheet legally binding? +
Most term sheets are non-binding on deal price and structure — either party can walk away without legal liability. However, specific provisions are typically binding: exclusivity (preventing the seller from negotiating with others during the exclusivity period), confidentiality (protecting disclosed information), and sometimes break-up fee provisions. Carefully review which sections are binding before signing.
What is an exclusivity provision in a term sheet? +
An exclusivity provision (also called a 'no-shop' clause) prevents the seller or borrower from soliciting competing offers or negotiating with other parties for a specified period — typically 30-60 days. Violating exclusivity can expose the breaching party to liability for the other party's deal costs (due diligence fees, legal fees, time). Exclusivity is almost always the most practically important binding provision in a term sheet.
How does an SBA commitment letter differ from a private-market term sheet? +
An SBA commitment letter is the lender's conditional approval document, subject to the SBA's Standard Operating Procedures (SOP 50 10). It specifies approved loan amount, rate, term, collateral, and conditions precedent to closing. Unlike a private-market term sheet which can be freely negotiated, SBA loan terms are constrained by SBA program rules — the lender cannot deviate from SBA maximums on rates, terms, or fees without an SBA waiver.
Further reading
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